Flow numbers have been “pretty crazy,” according to Dan Dolan, director of wealth management strategies at Select Sector SPDRs. At their peak, “in August-early September, 2008, we had $35 billion in assets–and then over the course of the next seven months we touched almost down to $15 [billion] and change…90% of that was pure market movement, and we lost some financial shares there as well. In the last five or six weeks, we’ve gone from $ 15 to $21 billion”–which brings Select Sector SPDRs, which have $1.1 billion shares outstanding, “back to mid-2008 levels.”
“The interesting one to me is financials–it still looks like they’re selling,” Dolan says. When you look at them, “even in the face of assets rising across the board and shares coming in–the financial sector [SPDR, XLF] still gets hit. It’s hard to say whether that’s just selling XLF, selling it short–are they buying one or two names that make it up and try to play the individual [names]? Are you hedging–kind of a sector-neutral [strategy] where you sell the sector and then buy…a couple of names…that you think are going to outperform?”
Dolan thinks there is some plain old selling, but he adds that the short position in XLF is “up significantly in the last couple of months. That’s amazing to me that that’s happening as this market is moving the way it is.”
Does that mean that there’s just no conviction here when it comes to financials? “I think that there’s some of that,” he says. “My best guess is it’s a combination of the two. When you look at year-to-date, we’re down 170 million shares of XLF–yet the short position is up 70 million shares. [There is] an awful lot of activity–it’s trading 250 million shares a day–it’s clearly still kind of the focus of the market and the question around the market is: What’s going on with the financial sector?”
Outside of the financial sector, in late 2007 and part of 2008, Dolan notes, “you saw steady flows into staples and healthcare; recently you’re seeing kind of a switch–the consumer discretionary is doing well and materials doing well–the more cyclical types of plays, which is very encouraging for the market if that flow is correct; that you’re looking at early cycle types of stuff, that maybe we are bottoming out. You move from your very defensive sectors to early cyclical types of things that should do well if the economy improves.”
But who is making these moves in Sector SPDR ETFs–is it retail or institutions? Dolan believes “that three-quarters of our activity–if not more–is driven by institutional investors: hedge funds, asset managers, program trading desks.”
That said, a lot of advisors are using ETFs, and Dolan explains that when advisors are ready to “Commit a little bit more to the equity markets, chances are,” they’re using ETFs because using individual names doesn’t give clients’ enough diversification in their portfolios. “The single-stock risk is too high.”
The best performing sector, year-to-date, Dolan explains, is technology, up 7% with “consistent” flows into the sector, followed by materials, up 4%. The rest of the sectors are down. The “real, established tech companies have almost become value plays,” they have real earnings, they pay dividends, and the big ones are global companies.
Hedging executives’ corporate stock positions
One way to use ETFs as a strategy for certain clients, such as executives who must maintain large positions in their company’s stock–that they’re discouraged or prohibited from selling–is to short the ETF that correlates to that stock. One example is Exxon-Mobil, which makes up 20% of the Energy Select Sector SPDR, XLE. Dolan notes that if a wealth manager wants to hedge that position, they can short XLE because it’s so correlative with the stock that it neutralizes that stock position to some extent. There’s a Correlation Tracker tool on the Select Sector SPDRs Web site.
Wealth Manager graphs the flows for individual Select Sector SPDRs in our own Advanced Investing Strategies area of our Web site. In May, Wealth Manager will launch a new e-newsletter, “ETF Expert,” with strategies for using ETFs in wealthy clients’ portfolios. Click here to sign up.
Kate McBride is editor in chief of Wealth Manager.