Follow the Fund Flows

Investors have every reason to feel like a tennis ball as the debate over when the FOMC might raise rates continues to rage.  Despite weak first quarter economic data, the FOMC meeting minutes along with statements by the various Fed presidents have confirmed that a rate hike as early as June remains on the table.  Rather than sending investor expectations spiraling downwards, equities have continued to push higher with the S&P 500 gaining an additional 1.75%.  While it could be that the possible certainty over the rate hike is easing investor anxiety, we’ll review our ETFG monthly fund flows data to analyze whether we’re in the midst of a much larger trend.

One domestic sector that has continued to push higher despite the more bullish dollar outlook is the Energy Sector where strong inflows have helped push the Energy Sector Select SPDR up nearly twice the S&P 500’s gain in April.  While the recent shift in language to a more “data dependent” outlook from the FOMC on future rate hikes may have helped add to UUP’s bounce off the 50 day moving average, the recent pullback from the peak in early March has helped breathe new life into the energy sector with $1.8 billion in positive flows last month.  While always tempting to point to the ongoing troubles in the Middle East for the stabilization in crude oil, the additional inflows into the broader natural resources ($82m) sector has us suspecting that the weaker dollar is more to blame which only raises our caution as the FOMC continues to stress that the recent weakness in the economic outlook and inflation is more likely to be “transitory” and that much of the dollar strength has more to do with Euro weakness.  The question we're asking is how much further can it run without another demand driver?

Much of the Energy Sector inflows have come from the Healthcare Sector where an additional $1.44 billion in assets fled the sector in March on top of the $1.36 billion that fled in January.  With valuations close to their historical peak, investors fearful about how those rising rates could affect investors required rates of return are seeking out opportunities amongst the more deeply discounted and little loved sectors.  Energy stocks were an obvious fit for investors looking to pick up negative correlations to the dollar but funds have also been flowing into the financials where the rising rates offer a glimmer of hope to regional bank stocks crushed by tighter interest rate spreads thanks to the Feds zero interest rate policy.  Over $300 million has flowed into the sector in March with the biggest asset gather has been the SPDR S&P Regional Banking ETF (KRE) where over $111 million in new funds have been put to work gaining exposure to these smaller banks.

Those shifting market expectations might also explain the $1.16 billion in positive flows that have pushed emerging market equities higher despite the rise in the dollar and lifted the largest EM fund, the Vanguard Emerging Markets VIPERS (VWO) up 9.28% over the last two weeks compared to a 1.99% bump for both UUP and the S&P 500.

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