ETF Investors Pick Riskier Financials Over the Safety of Utilities

(Bloomberg) -- With interest rates on the rise, exchange-traded fund investors are increasingly embracing risk, pulling cash out of defensive utilities and piling into more volatile financials.

Traders yanked almost $330 million from the Utilities Select Sector SPDR Fund, or XLU, Monday after three straight weeks of inflows. Meanwhile, the Financial Select Sector SPDR Fund, known as XLF, saw $368 million of inflows after four consecutive weeks of outflows.

The moves were reflected in the broader market Monday, where financials were the best performing industry group in the S&P 500 Index with a 2.3 percent rally, and utilities were the worst, sinking 3.1 percent. Indeed, XLF had gained for three straight days before losing ground Tuesday, when financials were the only sector in the benchmark to post a loss.

“The most important point about financials is they are very cheap now,” said JP Gravitt, chief executive officer and market strategist for Market Realist.

Banks are getting a boost ahead of earnings, as concerns over the recently completed Federal Reserve stress tests fade out of investors’ view, according to a note from Goldman Sachs Group Inc. analyst Richard Ramsden on Monday. A flattening yield curve, however, could make the financials ETF less attractive since 53 percent of its exposure is in banks.

The move out of defensive stocks like utilities and consumer staples runs contrary to the recent cautious narrative in the market. On Monday, Morgan Stanley’s chief U.S. equity strategist, Michael Wilson, called for an “aggressive rotation toward defensive sectors.” But not all investors are playing it safe.

“Utilities to me is just hide, hide, hide and it’s everything to do with rates,” Gravitt said. “People forget the Fed hiked rates, that makes utilities less interesting.”

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