Booming U.S. Seen in ETFs With Utilities Losing to Energy

Investors pulled almost $1 billion from exchange-traded funds holding utility stocks in the past five days as the outlook for a U.S. economic recovery boosts the allure of the energy and consumer industries.

Funds holding the likes of Duke Energy Corp. (DUK) and Southern Co. (SO), which tend to lose when interest rates rise because investors measure their dividends against debt returns, had the biggest outflows among industry-specific ETFs. Energy and consumer funds owning stocks such as Exxon Mobil Corp. (XOM) and McDonald’s Corp. added about $1.77 billion.

Bullish fund flows are bucking predictions that the world’s largest economy will grow 1.7 percent this year, slowing from 2.2 percent growth in 2013, according to economists’ estimates compiled by Bloomberg. The move also challenges declining yields on U.S. Treasuries as investors bet retail sales numbers due tomorrow will continue to signal an economic recovery for a sixth straight month.

“Investors are looking ahead to potentially improved retail numbers,” David Mazza, head of ETF research at State Street Bank & Trust Co., said today in an interview. “We’re seeing a rotation out of utilities and into consumer discretionary that is fairly broad based.”

Energy ETFs added about $460.7 million in the past week, extending their run as the best performer among 12 sectors tracked by Bloomberg this year. They’ve attracted $6.77 billion of new money since Dec. 31.

In the past week, funds holding stocks such as Amazon.com Inc. and The Walt Disney Co. (DIS), which benefit when consumers have more money to spend, attracted $1.31 billion after year-to-date withdrawals had reached $2.98 billion. Short interest, or bets the sector will decline, fell to the lowest level since February.

‘Coming Back’

“Discretionary ETFs were oversold and now folks are coming back,” Michael Block, chief equity strategist at Rhino Trading Partners LLC, said today in an interview.

The past week’s best performing consumer discretionary stock was Twenty-First Century Fox Inc. (FOX), up 12 percent after it abandoned the pursuit of rival Time Warner Inc. (TWX), announced a $6 billion share buyback and posted second-quarter profit that beat estimates.

State Street Corp. (STT)’s Consumer Discretionary Select Sector SPDR Fund (XLY) added $1.16 billion, its best week ever.

By contrast, investors pulled $694.3 million from the largest utility ETF, State Street’s Utilities Select Sector Spider Fund (XLU), the biggest weekly withdrawal in seven years. The Standard & Poor’s 500 Utilities Index has declined 7.1 percent since the end of June.

Treasury yields may rise after a strong second quarter with record corporate profits stemming from cost cutting and productivity gains, said Ryan Issakainen, ETF strategist at First Trust Advisors LP.

(An earlier version of this story was corrected to say that economic predictions were from economists.)

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net; Oliver Renick in New York at orenick2@bloomberg.net; Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net Carlos Caminada, Will Wade

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