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Fixed Income ETF Flows Anticipate Rate Hike in September: SSgA

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Fixed income ETF flows for July suggest that investors may be attempting to “better position portfolios for the anticipated September rate hike,” according to Dave Mazza, head of research for SPDR ETFs and SSgA Funds.

State Street Global Advisors and SPDR ETFs released on Monday its monthly report “US ETF Flash Flows” for July.

Overall, fixed income ETFs attracted inflows of $6.9 billion after recording $1.6 billion in outflows in June.

Digging deeper into fixed income category flows, Mazza finds a change in flows that suggests the rate hike is starting to affect investor sentiment.

“Investors shifted their focus away from [aggregate] funds and toward government and corporate funds, perhaps attempting to better position portfolios for the anticipated September rate hike,” Mazza writes in the July report.

Aggregate funds saw July inflows of only $737 million, a drop from the $1.3 billion the broad-based bond ETFs brought in for June.

Meanwhile, government and corporate funds both saw large jumps from their June performance.

In July, government funds saw $3.3 billion of inflows in July, up from the $193 million of inflows in June. This brings the YTD flows to nearly $5.5 billion.

Corporate funds brought in nearly $2.2 billion in the last month–in contrast to the $3.5 billion of outflows in June–bringing the y ear-to-date flows to nearly $8.3 billion.

Looking at the fixed income credit rating flows, Mazza says July was good for high yield debt (junk bonds), especially so after a tumultuous June.

High yield funds saw outflows of nearly $3.3 billion in June, because as Mazza said in June “high yield is suffering from investors getting nervous about rate hikes.”

In July, though, high yield funds bounced back, bringing in $856 million of inflows.

Despite high yield’s improvements this last month, investment grade ETFs continue to be favored over the last 12 months, according to SSgA.

In July, investment grade ETFs brought in $1.3 billion of inflows, bringing the trailing 12 month balance to $11.2 billion of inflows.

Commodity flows also saw some interesting changes this month.

Precious metals saw outflows of more than $1.5 billion last month, while energy funds brought in nearly $1 billion.

“Interestingly, the steep drop in the price of Gold was a headwind for precious metals flows, while the decline in the price of Oil had investors entering the sector,” Mazza writes. “Time will tell if its bottom fishing or short positioning.”

Equity ETFs

Equity ETFs continued their charge toward the $100 billion mark for the year with $16.6 billion of inflows in July, bringing the YTD flows to $90.3 billion.

U.S. equity ETFs also continued in popularity, with $13.4 billion of inflows in July, up from the nearly $9.5 billion of inflows into the U.S. sector in June.

“In the month of America’s Independence, investors showed a strong preference for the land of the free and home of the brave–and with good reason as risks emanated from China to the eurozone while U.S. economic data strengthened,” Mazza writes in the report.

The flows that did go to foreign markets were currency hedged, which Mazza called “a smart move” considering Bloomberg’s U.S. Dollar Index gained 1.6% for the month.

According to SSgA, currency hedged ETFs led foreign market flows, attracting $3.1 billion, which brought YTD flows to $43.1 billion.

Looking into the equity sector flows, Mazza finds popular sentiment remains within the health-care and financials sectors, but has fallen for the technology sector.

“Health care had another strong month of inflows, continuing a long term trend for the sector,” Mazza writes.

The sector brought in nearly $2.6 billion of inflows in July, following the $2.8 billion it captured in June. Year-to-date, health care has brought in flows of $12.02 billion.

According to Mazza, “financials continued to gather assets ahead of a potential rate hike in the fall.”

Financials brought in nearly $1.6 billion in the last month. In June, the sector brought in nearly $2.3 billion.

Meanwhile, technology, which Mazza calls “a beloved sector all year,” saw outflows in July of $499 million. Mazza attributes this to “perhaps some profit taking after mixed Q2 earnings from some Tech bellwethers.”

In June the sector brought in $1.04 billion of inflows. 

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