U.S. equity ETFs see outflows of $4.5 billion as traders price in Fed rate hike

U.S. equity exchange-traded funds experienced $4.5 billion in outflows this week due to heightened expectations for a Federal Reserve interest rate increase on Wednesday, per Jefferies. ETFs tied to the consumer discretionary sector were the main contributors to the weekly withdrawals, which were primarily driven by sensitivity to interest rates.

The S&P 500, after a loss for the shortened holiday week, ended the period down nearly 1% after data indicated elevated price pressures in producer and consumer inflation. The odds of a Federal Open Market Committee (FOMC) rate hike by 25 basis points climbed to around 87%, up from approximately 59% the previous week. This surge in rate hike expectations contributed to a sharp rise in government bond yields, with the benchmark 10-year yield climbing 19.1 basis points to end the week at 4.975%, nearing the key 5% level.

Consequently, $4.45 billion was pulled from equity ETFs this week, compared to an inflow of $1.35 billion the prior week. The Invesco QQQ Trust, tracking the tech-heavy Nasdaq 100, saw $588.6 million in outflows, reversing a $2.62 billion inflow from the previous week. Net outflows across the three major S&P 500-tracking funds totaled $3.23 billion, largely due to a significant $31.11 billion exit from the iShares Core S&P 500 ETF.

Analysts noted a divergence among Large Core ETFs, with significant withdrawals from the iShares Core S&P 500 ETF and the Invesco QQQ Trust.