Sector ETFs Attracted $7.5B in July

Investor appetite for riskier investments grew in July. They poured $7.5 billion into sector ETFs, the most since last October, focusing on energy and financials, according to a report by State Street Global Advisors. 

ETFs saw $54 billion in July inflows, with about $40 billion of that going into stock funds, showing that investors have stopped shying away from investing in this year’s rally.  

That willingness to buy into the market was clearest in the comeback of sector funds, with cyclical sectors—those that are most affected by the ups and downs of the economy—taking in $8 billion. More defensive sectors, those that are less affected by economic booms and busts, had outflows. “Sector flows were positive, which is an expression of risk,” said Matthew Bartolini, managing director and head of SPDR Americas Research, in an interview.  

The two sectors with the most inflows were financials, with $2.4 billion, and energy, with $1.5 billion, followed by industrials, consumer discretionary and real estate, all of which are bets on a better economy going forward. Defensive sectors did poorly, with healthcare suffering $1.3 billion in outflows while utilities lost $200 million. 

The tech sector had about $400 million in outflows, as investors took profits after a huge run-up in the first half of the year powered by several of the “magnificent seven” stocks such as Nvidia Corp., Apple Inc. and Microsoft Corp. The strongest of the defensive sectors was consumer staples, with positive flows for July, but even that had outflows over the past three months.  

Sector ETFs 

Focusing on the back half of the year, Bartolini said investors should look at broader macro factors such as interest rate decisions from the Federal Reserve and economic numbers. One thing to monitor specifically is the Fed’s Jackson Hole conference later this year.  

He also thinks that out of the three sectors that have seen some of the biggest moves this year—consumer discretionary, tech and communications services—the latter’s valuation looks the least stretched, so it may have more room to grow than the other two. 

Contact Gabe Alpert at [email protected]