U.S. equity ETFs see outflows of $4.5 billion as traders price in Fed rate hike
U.S. equity ETFs see outflows of $4.5 billion as traders price in Fed rate hike
U.S. equity exchange-traded funds saw outflows of more than $4 billion this week, Jefferies said on Saturday, as investors ramped up their expectations for a Federal Reserve interest rate hike on Wednesday. ETFs sensitive to interest rates were the primary drivers for the weekly outflows, including those tied to the consumer discretionary sector.
Wall Street is coming off a loss for the holiday-shortened week, with the benchmark S&P 500 snapping a two-week win streak and falling nearly 1%. The decline came after producer and consumer inflation reports showed elevated price pressures. Odds of the Federal Open Market Committee (FOMC) raising the key policy rate by 25 basis points surged on the data to about 87% from around 59% a week ago.
The increase in rate hike bets added to an ongoing rout in government bonds, resulting in strong weekly advances in U.S. Treasury yields. The benchmark 10-year yield rocketed 19.1 basis points for the week to end at 4.975%, coming within striking distance of the key 5% level on Friday.
Against this backdrop, market participants pulled out $4.45 billion from equity ETFs this week, compared to an inflow of $1.35 billion the week before that. Net outflows across the three biggest funds tracking the benchmark S&P 500 were $3.23 billion, primarily due to a whopping $31.11 billion exodus from the iShares Core S&P 500 ETF.
“We continue to see significant divergence among Large Core ETFs, resulting in net outflows for the category. This past week, IVV saw a very chunky withdrawal. One step back for the QQQ, while interest in Biotech cooled,” Jefferies’ analysts led by Steven DeSanctis said.
The Invesco QQQ Trust, which tracks the tech-heavy Nasdaq 100, saw outflows of $588.6 million this week, reversing from an inflow of $2.62 billion the previous week. Stocks of tech companies tend to be weighed down by a rise in interest rate hike expectations and borrowing costs, as the value of their future profits are reduced.
Meanwhile, equity outflows from consumer discretionary ETFs were $528.3 million this week. The sector can see an outsized impact from higher rate environments as well, as consumer spending and borrowing capacity takes a hit. Elsewhere, outflows from high yield fixed-income ETFs were more than $900 million for a second straight week amid the extended bond rout.
“The bigger item to watch is the continued outflows from High Yield, as this needs to change or issuances will slow and spreads widen. We also saw a chunky withdrawal from Investment Grade,” the Jefferies analysts noted.
“Although overall flows were weak, we saw just as many ETFs see inflows as outflows on the week. Total Market continued to see inflows with the interest exceeding that of last year's, while flows to Financials rebounded. Low Volatility took in some dollars, along with Health Care,” they added.