Stock Rotation Swamps Bank ETFs With 38% of All New Cash in 2022

(Bloomberg) - More than a third of all new cash flowing into U.S. ETFs this year has gone to funds pegged to financial stocks.

As the great equity rotation sweeps the $7.1 trillion industry, these relative minnows -- which account for well below 2% of the exchange-traded fund market by assets -- have already lured almost $3.8 billion, according to data compiled by Bloomberg.

U.S. ETFs overall have attracted about $9.9 billion.

With the major Wall Street banks set to kick off earning season this week, the biggest product tracking financial equities, the $48.9 billion Financial Select Sector SPDR Fund (ticker XLF), is growing at the fastest pace in almost a year. It gathered $2.3 billion last week as its shares jumped more than 5%.

Bank stocks have kicked off the new year with their best start in more than a decade. The KBW Bank Index, which tracks 24 of the largest U.S. lenders, jumped more than 10% last week.

“Higher long-term bond yields are the immediate catalyst for banks, as they are one sector that has typically performed well when interest rates have been rising,” said Edmund Shing, BNP Paribas Wealth Management’s chief investment officer. “Balance sheets are strong, profits are rising thanks to the strong economic growth backdrop and dividends/share buybacks are increasing too.”

Signals by the Federal Reserve that it’s getting closer to rate liftoff are sending benchmark Treasury yields toward the 2% level and near the highest in two years. Goldman Sachs Group Inc. now expects policy makers to raise rates four times this year and start its balance sheet runoff process in July, if not earlier.

It’s all spurring a shift into into cheaper value equities with more near-term cash flows, and away from expensive growth stocks with longer-term revenue projections that look less appealing when rates and inflation rise.

Alongside the asset gains for financial ETFs, the Energy Select Sector SPDR Fund (XLE) added $1.2 billion last week, the most since March.

“With markets overly focused on yields now, the upcoming reporting season will be an important catalyst to reconnect stock prices with fundamentals,” said Emmanuel Cau, head of European equity strategy at Barclays Plc. “Financials should remain well-bid.”

By Denitsa Tsekova


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