Investors Rush Into Defensive ETFs as Market Turbulence Grows

Investors Rush Into Defensive ETFs as Market Turbulence Grows

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

Net inflows into defensive ETFs—or those related to the consumer staples, healthcare, utilities and real-estate sectors, along with precious metals, Treasurys and commodities—have totaled $50 billion this year, according to

morning star

data through April. That sum has already outpaced the group’s $42 billion in inflows for all of 2021 and is on track to top 2020’s total of $75 billion as well.

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

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

persistent inflationary pressure, geopolitical turmoil and worries about a potential recession have dragged the S&P 500 down 13% this year. The technology-oriented Nasdaq Composite Index has fallen even farther, off 21%. The latter suffered its worst session since June 2020 on Thursday, with investors worried about the pace of the Federal Reserve’s campaign to raise rates.

ETFs in the consumer staples and healthcare groups have seen some of the biggest inflows of late. The staples, healthcare, utilities and real-estate sectors are considered safety plays because consumers tend to pay for food, hospital bills, electricity and rent before discretionary purchases.

The Consumer Staples Select Sector SPDR ETF, which tracks shares of 34 companies in industries from tobacco to food and beverage, recorded $1.25 billion in net inflows in April, the most since January. Shares of Marlboro cigarette-maker

Altria Group Inc..

and grocery

Kroger Co..

are among the best performers in the fund this year. Both stocks have jumped nearly 20%, while the fund itself has slipped 0.6%.

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

“These funds are constructed basically to offer smooth rides to investors. I think of them like house cats—they’ll pull an occasional rodent into the house and they’re going to do what you expect most of the time, but they’ll misbehave every once in a while because it is in their nature, Mr Jackson said.

Netflix’s new action-thriller ‘The Gray Man,’ with Chris Evans. Technology-driven companies like Netflix are in the S&P 500’s communication-services segment, which has failed 24% this year.


Photos:

Paul Abell/Associated Press

Behind the energy group, which has climbed 43% this year, the utilities and consumer staples segments are the best performers in the S&P 500 this year, off less than 0.1% and 0.6%, respectively. The tech sector has dropped 19%, and the communication-services group—which includes technology-driven companies, like

Netflix Inc..

,

Alphabet Inc..

and

Facebook

parent

Meta Platforms inc.

—you have failed 24%.

The Fed on Wednesday approved a half-percentage-point interest rate increase—the largest since 2000—and a plan to shrink its $9 trillion asset portfolio as officials kicked into higher gear a campaign to slow four-decade highs in inflation. Tech stocks are especially sensitive to rising rates because they are valued based on expectations of growth far into the future.

“We’re not in the recession camp, but we do think there’s going to 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.

Mr. Lerner says his firm has been recommending areas of the market like staples, healthcare stocks and real-estate investment trusts to investors this year as a hedge against a global growth slowdown or an aggressive Fed.

Other investors who are betting that inflation will remain elevated are turning to commodity-focused funds. Russia’s invasion of Ukraine powered commodities from aluminum to wheat to new highs this year. Commodities tend to rise alongside inflation and serve as a hedge against declines in the other assets in a portfolio.

the

VanEck Gold Miners ETF

has risen 8.1% this year and received $432 million in net flows in April, the most since June 2021. The Invesco DB Commodity Index Tracking Fund, which holds commodities futures in energy, precious metals, industrial metals and agriculture sectors categories, has jumped 36 %.

Rising Covid-19 cases in China and a stronger US dollarhowever, have dragged some commodities off their highs.

“I’m going to take an approach that is kind of a ‘belt and suspends’ approach, which is to say I’ll be long that which is less volatile within the market, and my risk is that I’m giving up some upside if suddenly this market starts to rally,” Mark Luschini, chief investment strategist at Janney Montgomery Scott, said of his firm’s commodities holdings.

Write to Hardika Singh at hardika.singh@wsj.com

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