Virus Woes Hit $11 Billion Growth Proxy in Record ETF Exodus

(Bloomberg) -- The rapid spread of China’s coronavirus has exchange-traded fund investors souring on industrial companies.

State Street Corp.’s $11.3 billion Industrial Select Sector SPDR Fund, ticker XLI, saw a record outflow of about $848 million on Monday, according to data compiled by Bloomberg. A gauge of S&P 500 manufacturers sank 3% on Tuesday, extending its slide into an eighth day -- the longest since 2011 -- as investors remained on edge over the spread of the coronavirus.

The industrial swoon highlights growing anxiety about the impacts of the deadly disease on the global economy. Some of the ETF’s biggest holdings include multinationals such as Boeing Co. and Honeywell International Inc. Those are precisely the types of companies that would be hit hardest should the virus spread further, said Matt Maley, an equity strategist at Miller Tabak & Co.

“Industrial companies tend to be global companies,” Maley said. “If we see more lockdowns, the transporting of goods around the globe will slow. That is not good for industrial companies.”

The worrying prospect that the coronavirus outbreak could become the first truly disruptive pandemic of the globalization era is renewing doubts over the stability of the world economy. With the death toll approaching 3,000 and over 80,000 cases officially recorded, Oxford Economics Ltd. reckons an international health crisis could be enough to wipe more than $1 trillion from global gross domestic product.

President Donald Trump sought to reassure Americans on Tuesday that the coronavirus outbreak poses little threat, but the Centers for Disease Control and Prevention warned hours later to prepare for the disease to disrupt daily life in the U.S.

Should the worst-case scenario pan out, industrials may bear the brunt of the market fallout, according to Northwestern Mutual Wealth Management Co.

“In a period of time where people are concerned about growth, they look for where growth may be -- or at least a lack of downturn in economic growth,” said Brent Schutte, the chief investment strategist at Northwestern Mutual. Industrials “are much more dependent on economic growth.”

Industrial profits are expected to decline for the next two quarters, before rebounding in the latter half of 2020, according to data compiled by Bloomberg Intelligence. The sector’s earnings fell in 2019, led by a slump in capital goods.

The ETF exodus reduced this year’s intake by industrial funds, which have lured $733 million so far in 2020. XLI -- the largest in the sector -- was responsible for most of those flows.

--With assistance from Vildana Hajric and Lu Wang.

To contact the reporter on this story: Katherine Greifeld in New York at kgreifeld@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Rita Nazareth, Randall Jensen

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