June 25, 2021

Reflation Trade Slowing? Lipper Financial Services ETFs Report Record Outflow

by Jack Fischer.

Lipper Financial Services ETFs suffered their largest historical weekly outflow this past week, losing $2.6 billion. This classification not only led all Sector Equity ETFs but all Lipper ETF classifications in outflows for the week. The past Refinitiv Lipper fund-flow week marked a significant trend reversal for Lipper Financial Services ETFs. During the first quarter, the classification attracted $15.9 billion—leading all Sector Equity fund classifications. While they still hold the Sector Equity top spot in year-to-date flows (+$18.8 billion), their preliminary June flows have them at the very bottom of the totem pole (-$2.2 billion). For more weekly flow trends check out this week’s U.S. Weekly FundFlows Insight Report.

The calendar years 2019 and 2020 were not kind to Lipper Financial Services ETFs or value-oriented equities in general. The start of 2021 was a different story, investors anticipated that an economic reopening and a steepening in the Treasury yield curve would bring good fortunes to the financial institutions. Two of the top six weekly net inflows on record for the classification occurred within the first couple of months of 2021. As of the end of May, the 10-year Treasury yield was up 74.7% on the year, while the two-year yield only increased 19.8% over the same period. Many financial institutions borrow in the short term and lend in the long term, making for a relatively favorable environment for the funds within the classification. Enter June, where the chatter picked up regarding the Federal Reserve increasing interest rates to abate any oncoming inflation. The two-year Treasury yield spiked 80.7% as the 10-year yield fell 6.7%, resulting in a flatter yield curve since the start of the month.

As the short-term yields outpaced their longer-dated counterparts, we started to see flows subside into Lipper Financial Services ETFs and ultimately leading to their largest outflow to date. We began to see an unwinding of the reflation trade which has been highly touted since the start of the year. The reflation trade aided fund flows into value, financials, and real assets while pulling money out of growth-oriented equities and technologies.

Technology issues did well during the lockdowns as software and streaming companies saw an increase in users. Lipper Science & Technology ETFs led all Sector Equity classifications in net inflows during 2020. However, since the start of 2021, there appears to be a tug-of-war between Lipper Science & Technology ETFs and Lipper Financial Services ETFs. While rising long-term yields and increasing inflation expectations tend to improve outlooks for financials, the same environment hurts technologies as their balance sheets are often filled with longer-dated debt to fund operations. Lipper Science & Technology led all Sector Equity funds attracting $911 million this past fund-flows week.

Are this week’s flows a sign the market is starting to believe the Fed will step in before a more permanent inflationary environment sets in? Or is this just a temporary blackeye for the reflation trade?


The below chart details the four largest weekly outflows by the fund management company under Lipper Financial Services ETFs as well as the top four weekly inflows under Lipper Science & Technology ETFs.

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