Investors flock to defensive ETFs as market turbulence increases

Nervous investors are pouring money into exchange-traded funds tied to defensive sectors, seeking safety in a market that continues to be rocked by concerns about rising interest rates.

Net inflows into defensive ETFs – or those linked to the consumer staples, healthcare, utilities and real estate sectors, as well as precious metals, Treasuries and commodities – totaled 50 billion this year, according to Morningstar data through April. That sum has already surpassed the group’s $42 billion in entries for all of 2021 and is also on track to surpass the $75 billion total for 2020.

“Investors want safety, they want safety, and they want to go somewhere where they feel like their money will be a little bit more protected, even in a turbulent environment,” said Ryan Jackson, management research analyst at passive funds at Morningstar.

Ongoing inflationary pressures, geopolitical unrest and worries about a possible recession have dragged the S&P 500 down 13% this year. The technology-focused Nasdaq composite index fell another 22%. The latter suffered its worst session since June 2020 on Thursday, as investors worried about the pace of the Federal Reserve’s rate hike campaign.

ETFs in the consumer staples and healthcare groups have seen some of the biggest inflows of late. Commodities, healthcare, utilities and real estate sectors are seen as security players as consumers tend to pay for food, hospital bills, electricity and rent before discretionary purchases.

The Consumer Staples Select Sector SPDR ETF, which tracks the stocks of 34 companies in sectors ranging from tobacco to food and beverages, saw $1.25 billion in net inflows in April, the most since January. Shares of cigarette maker Marlboro Altria Group Inc.

and grocer Kroger Co.

are among the best performers in the fund this year. Both stocks jumped almost 20%, while the fund itself slipped 0.5%.

Meanwhile, the Health Care Select Sector SPDR ETF saw $1.7 billion in inflows in April, the most since July 2021. The Utilities Select Sector SPDR ETF saw $923 million in net inflows in the month last and the Real Estate Select Sector ETF SPDR received $306 million. These entries were the highest since January 2022 and December 2021, respectively.

“These funds are basically designed to provide smooth journeys for investors. I consider them house cats – they will occasionally lure a rodent into the house and they will do what you would expect most of the time, but they will misbehave once in a while because that is in their nature,” Mr. Jackson said.

Behind the energy group, which has climbed around 45% this year, the utilities and consumer staples segments are the best performers in the S&P 500 this year, with utilities up 0, 7% and Core Goods down 0.6%, respectively. The tech sector fell 19% and the communications services group, which includes tech-focused companies like Netflix Inc..

Alphabet Inc..

and Facebook’s parent meta-platforms Inc.

— fell by 25%.

The Fed on Wednesday approved a half-point interest rate hike – the biggest since 2000 – and a plan to trim its asset portfolio by $9 trillion as authorities shifted into gear superior in a campaign to slow inflation’s four-decade highs. Tech stocks are particularly sensitive to rising rates because they are priced against long-term growth expectations.

“We are not in the recession camp, but we believe there will be pockets in the bull [market] where you see recession or much slower growth,” said Keith Lerner, co-chief investment officer and chief market strategist at Truist Advisory Services Inc.

Lerner says his firm has recommended market sectors like commodities, health care stocks and real estate investment trusts to investors this year as a hedge against slowing global growth or an aggressive Fed.

Other investors betting that inflation will stay high are turning to commodity-focused funds. Russia’s invasion of Ukraine has propelled commodities from aluminum to wheat to new heights this year. Commodities tend to rise in line with inflation and act as a downside hedge against other assets in a portfolio.

The VanEck Gold Miners ETF is up 6.8% this year and received $432 million in net flows in April, the most since June 2021. The Invesco DB Commodity index tracker fund, which holds forward contracts commodity futures in the energy, precious metals, industrial metals and agriculture categories, jumped 36%.

Rising Covid-19 cases in China and a stronger US dollar, however, took some commodities off their highs.

“I’m going to take an approach that’s kind of a ‘belt and suspenders’ approach, which is to say I’ll be long on what’s least volatile within the market, and my risk is that I’ll give up. some up so suddenly this market starts to rally,” Mark Luschini, chief investment strategist at Janney Montgomery Scott, said of his firm’s commodity holdings.

US markets indicate that investors expect inflation to decline from its current 40-year high, but its decline will be slower than previously thought. The WSJ’s Dion Rabouin explains why and what it could mean for Americans. Image: Spencer Platt/Getty Images

Write to Hardika Singh at [email protected]

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