Contrarian alert: ETF investors crowd into tech, flee consumer defensive sector

Watching funds with biggest flows is one way to gauge future performance

Jun 9, 2017 @ 2:01 pm

By John Waggoner

If you're a contrarian, and believe that it's best to buy what other investors hate, then it's time to load up on consumer defensive ETFs and ditch your technology holdings, according to estimated asset flows for May. Just be sure to read the important disclaimers below.

Contrarian investing is predicated on the notion that you should keep track of the masses, "because they soon turn into asses."

One way to keep track of the masses is inflows to mutual funds. By and large, most individual investors invest in diversified stock funds because they have to: Big inflows to Vanguard Total Stock Market Index fund (VTSMX) may be less a signal of investor madness than a matter of what funds are available to the investor.

Those who buy sector ETFs, however, tend to be more active traders who chase performance. Technology ETFs, for example, have seen the greatest inflows during the past 12 months, gaining an estimated net $13 billion in new money, according to Morningstar. The funds have gained an average 35.7% the past 12 months.

Were we to look at asset flows a year ago, however, we'd find that tech funds were about as popular as a skunk at the company barbeque: Investors sold an estimated $3.4 billion of tech stocks in the 12 months ended May 2016.

Conversely, investors in consumer defensive ETFs have yanked an estimated $3.7 billion over the past 12 months, Morningstar says. The group has gained 8.9%. Just 12 months earlier, however, the funds attracted $2.1 trillion in fresh assets.

After technology, the two most popular Morningstar categories have been financials, which gained $12.1 billion in the past 12 months, and industrials, which saw $8.1 billion in new money. Least popular after consumer defensive stocks: Utilities, which saw $3.7 billion flee, and consumer cyclical ETFs, which watched $2.5 billion exit.

Popularity can last far longer than anyone might expect, and selling top sectors short could have brutal consequences: Tech leaders like Facebook, Apple, Amazon, Netflix and Google are cash-rich behemoths.

And true contrarians don't just swim against the tide: They wait for key turning points. Nevertheless, if your clients are considering any of the funds with the biggest inflows in the past 12 months, you might want to wait until they get a bit less popular.

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