As we head into the final stretch of the year, it’s become clear that defensive sectors are losing steam.
Consumer staples (XLP) and Utilities (XLU) — both traditionally seen as safe bets during volatile times — have broken their trends, with lower highs and lower lows signaling a steady decline.
This relative weakness tells us one thing: Money is moving out of these sectors, and if you’re focused on maximizing returns, it’s time to pay attention to where it’s going.
Consumer Staples, heavily reliant on imported goods, are under pressure from rising costs associated with tariffs and repatriation efforts, especially as many staples come from places like China.
This push has created a downward trend in XLP, mirroring what we’re seeing in Utilities as well. The same goes for Health Care (XLV), another typically defensive play, which has seen a similar downward movement.
These sectors aren’t attracting capital right now — not when the overall market has stronger momentum elsewhere. Portfolio managers looking to bump up their returns before year-end aren’t going to park money in these underperforming areas — they want growth.
With low-yield sectors falling out of favor, money is now chasing higher-risk, higher-growth opportunities. We see this shift in the outflows from bonds as well — another traditionally safe asset that can’t deliver the returns needed in a year-end rally.
Bonds are low-yield, safe-haven assets, but in an environment where interest rates are moving higher, they’re even less attractive. As a result, professional money managers who control hundreds of millions or billions of dollars are reallocating to sectors with stronger growth potential.
So, where exactly is all this money going?
The answer lies in the high-growth spaces within the Consumer Discretionary (XLY) and Communication Services (XLC) sectors. XLY, encompassing areas like consumer-driven tech and retail, is a go-to spot for those chasing returns as consumers continue to spend despite rising credit costs.
Within XLC, we see the technology-focused, communication-heavy companies that are drawing capital thanks to their consistent revenue growth and potential for long-term gains. Even within Tech (XLK), which has seen some volatility, certain segments are benefiting from the overall market momentum, though not quite to the extent of XLY and XLC.
Take SMH, for example — the Semiconductor ETF.
It’s still in a consolidation phase, not yet fully rallying alongside other high-growth sectors. So for now, XLC and XLY are leading the way, showing that capital is targeting not just high returns but also areas where growth is resilient.
If major players are making these moves, then retail investors should consider taking a closer look, too.
The rotation out of defensive sectors and into higher-growth spaces signals a trend that can help individual portfolios stay aligned with where the momentum is strongest. At a time when Consumer Staples, Utilities, and bonds aren’t delivering, focusing on growth-oriented sectors could be the strategy that maximizes returns through year-end.
Keep an eye on these capital flows — they’re telling us where the professionals think the market is headed, and right now, that’s away from safety and into sectors with clear upside potential.
Kane Shieh
Kane Shieh Trading
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