Mass Exodus: Near Record Outflows For Financial Service Funds

According to new data from Lipper Alpha Insight, Financial Services Funds (including both mutual funds and exchange-traded funds) saw two of their most significant outflows of 2019 during the first half of August.

Financial Services Funds recorded $1.7 billion and $1.3 billion net outflow for the weeks ended Wednesday, August 7 and Wednesday, August 14.

Year to date, the fund's net-negative flows reached $9.4 billion, slightly under its worst-ever annual net outflow of $9.5 billion in 2018.

"Financial services sector funds have been hurt by the continued talk of a global economic downturn as well as the current interest rate environment. Weak economic and inflation data coupled with the escalation of the U.S.-China trade war and the protests in Hong Kong led to a temporary inversion of the important 2-year/10-year Treasury spread on August 14. This spread is important because it has been a reliable predictor of recessions in the past, with the recessions generally starting one to two years after the inversion. The Federal Reserve's reversal in its stance on interest rates has also hampered the group. As the primary business of banks is to loan money higher interest rates are good for business. It has been a huge negative for the sector that the Fed has done a complete 180-degree turn from forecasting two rate hikes in 2019 to reducing rates by 25 basis points at its last meeting," Lipper Alpha Insight said.

A large percentage of the net outflows came from exchange-traded funds (ETF).

Financial services ETFs posted $8.0 billion of net outflows YTD, and about $3 billion of that was exited this month. Financial Select Sector SPDR Fund (XLF) accounted for $2.5 billion of the recent net outflows.

Amid near-record outflows, Presiden Trump held a conference with J.P. Morgan Chase CEO Jamie Dimon, Bank of America's Brian Moynihan and Citigroup's Michael Corbat, to discuss stock market volatility and recession warnings from the bond market.

Trump and the bank CEOs also talked about the Federal Reserve and the global economic slowdown that has central banks across the world, cutting policy rates to ease monetary conditions.

XLF has gone nowhere in 19 months as near-record outflows continue. This could be the point where XLF turns south, retests December 2018 lows.