Inflows into value sectors headline first week of 2022

The anticipation of higher interest rates to cool off inflation may have shifted investors' interest from growth to value sectors like financials, industrials, healthcare, energy, and consumer staples. Growth companies rely on heavy borrowing to spur growth and so when borrowing becomes more expensive (due to higher rates), growth needs to make up for it. Value stocks however rely less on borrowing and therefore, are less impacted by rising rates. The rotation can be seen in some of the largest ETF inflows in week 1 of 2022.  

The Financial Select Sector SPDR Fund (XLF), which invests in financial companies (e.g., banks) of the S&P 500, drew $1.4 billion of net flows to start the year. Banks make their core profits from collecting more interest from borrowers than they must pay depositors. As the Federal Reserve raises interest rates, banks can start charging more for loans but are unlikely to face higher deposit costs immediately.

The Health Care Select Sector SPDR (XLV) Fund attracted $1.12 billion in its first week in 2022. Investors expect that demand for health care products and services will remain strong in midst of a lingering COVID-19 pandemic.

On the other hand, demand for food, heating, cooling, education, and products for daily living, will likely remain stable, even during a high-interest period. The safety cushion provided by related stocks and funds attracted $971 and $695 million into Energy Select Sector SPDR Fund (XLE) and Consumer Staples Select Sector SPDR Fund (XLP) respectively.

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