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ETF News And Commentary

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U.S. stock markets saw a profitable 2013 hitting multi-year highs day in, day out and rewarding investors with a 30% return. The good news spilled over to the ETF world as well with investors injecting a record $188.54 billion into U.S.-listed ETFs in 2013, which was even greater than the prior year’s asset generation, though marginally. 
 
However, things took a sharp turn to start this year thanks mainly to the beginning of an end to the cheap-dollar era in the U.S. and its effect in other markets and asset classes across the world.
 
The recent weak manufacturing data has also raised doubts over the earlier robust U.S. growth outlook. The ETF world has also failed to add meaningful assets so far this year, with the total industry actually losing over $24 billion since the beginning of the year.
 
Amid such a backdrop, it will be prudent to note some most unpopular sectors to gauge investor sentiment regarding the next move of the economy. While looking into this, we noted that some big sectors including consumer discretionary, consumer staples, industrials and financials shed $2.21 billion, $1.06 billion, $1.13 billion and $1.11 billion in assets, respectively, in the YTD frame (read: What is the Biggest Risk to the Market in 2014?).
 
Consumer – Cyclical & Non-Cyclical
 
Although the overall consumer confidence as per the Conference Board by Nielsen, remains sound in the U.S. growing in January for the second successive month, the improvement was not enough to cheer investors.

In fact, as per another association – the University of Michigan and Thomson Reuters – consumer sentiment wavered in January as optimism over long-term job growth and economic self-sufficiency was seemingly moderate.

The surveyors feel that consumer confidence could take another round of beating in the coming months as the chilling weather in much of the country led to high heating bills – a drag on low-income earners while plunging stock markets and sluggish home prices will hit high-income consumers. 

Amid such a scenario, consumers will surely think twice before being extravagant on discretionary spending. This might be the cause for which Consumer Discretionary sector lost its appeal and investors chose to move out.

Consequently, Consumer Discretionary Select Sector SPDR Fund (XLY) lost $1.80 billion in assets – highest in the space. The fund in fact lost a little less than 5% within the last one-year period.  SPDR S&P Retail ETF (XRT), First Trust Consumer Discretionary AlphaDEX Fund (FXD), Guggenheim S&P Equal Weight Consumer Discretionary ETF (RCD) have all shed about  $212.9 million, $138.44 million, $48.4 million assets in the consumer discretionary space.
 
The faltering consumer sentiment seems to have hit even the Consumer Staples ETFs which is a stable corner of the consumer space.  As per the Sterne Agee analyst, higher home heating bills could restrict consumer spending “well into April”.

Consumer Staples Select Sector SPDR Fund (XLP) shed $869.9 million in assets year to date. The depletion of assets intensified in the past one week as XLP has seen an outflow of $1.29 billion. XLP’s prices were also down 4.3% in the last one month.

Another staples fund seeing strong outflow in the last one week was First Trust Consumer Staples AlphaDEX Fund (FXG). The fund shed $201.3 million (read: A Comprehensive Guide to Consumer Staples ETFs).

Industrials

Weak manufacturing data for January made investors wary of the industrial sector. The U.S. ISM factory index for January was recorded at 51.3 — the slowest pace in eight months. The reading lagged the median estimate of 56 and the prior-month score of 56.5.

A colder-than-usual winter in the U.S. arguably preyed on production and demand. The investors might have got an idea of this weaker trend as SPDR Dow Jones Industrial Average ETF (DIA) and Industrial Select Sector SPDR Fund (XLI) bled, respectively, $733.9 million and $626.8 million in assets year to date.

Financials

As interest rates wallowed in the beginning of 2014, worries started to build over the financial sector.  With the escalation of the Fed QE taper, risk-averse investors fled from equities to safe-haven U.S. government debt which pushed down the long-term interest rates while short-term rates remained almost unchanged (read: 3 Bond ETFs Kick Off 2014 with Strong Inflows). 

Banking and insurance stocks normally tend to underperform in such conditions as their borrowing costs remain untouched while lending rates are low, leading to shrinkage in the corporations’ net interest margin.
Quite expectedly, this scenario compelled investors to pump $638.7 million of assets out of the biggest financial ETF – Financial Select Sector SPDR Fund (XLF) – in the year-to-date frame (read: Mixed Banking Earnings Put These ETFs in Focus).

Most Recent Trend

After discussing the year-to-date performance thus far, the most recent trend also warrants a look. While ETFs XLY and XLP shed more than $1 billion in assets at the time of writing (over the past week), the losing streak also persists in industrials.

However, financials managed to draw some investor attention as the interest rate scenario started improving this month. Replacing financials, the energy sector entered the top-losers list with Energy Select Sector SPDR Fund (XLE) shedding more than $200 million over the past week.

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