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The Tell: Bank of America clients sold last week’s stock-market rally while buying ETFs

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Bank of America clients sold the stock-market rally last week but were buying exchange-traded funds across styles in a tough year for equities, according to BofA Global Research. 

The bank’s clients were net sellers of U.S. stocks for a third straight week, BofA equity and quant strategists said in a research note dated June 27. They sold as the S&P 500
SPX,
-1.83%

rallied more than 6% last week, “although outflows were ‘muted,’” the strategists said.

Meanwhile, ETFs drew interest as investors continued to weigh odds of a recession and how aggressive the Federal Reserve may need to be hiking interest rates to cool the economy and fight inflation. 

“Despite sales of single stocks, clients bought ETFs across styles,” including growth, blend and value, the strategists said, with growth leading. They also purchased ETFs across size segments, “except small caps after some initial signs of a more positive sentiment shift in small caps last week.”

BofA clients were “defensive,” contributing to utilities and staples while selling stocks in the other nine of 11 sectors, according to the note. Tech suffered the biggest outflows in the week through June 24, while ETFs attracted the biggest inflows, a chart in the report shows.

BOFA GLOBAL RESEARCH REPORT DATED JUNE 27, 2022

Within ETFs, BofA’s clients bought four of the 11 sectors last week, with inflows led by tech and materials, according to the note. Energy and utilities ETFs had the biggest outflows.

“Sales of Energy ETFs were the largest since July 2017 after strong passive buying in the sector since early 2022,” the strategists said.  But in their view, the big outflows don’t mean the sector’s strong performance relative to other areas is finished.

“We don’t think Energy’s outperformance is over,” they wrote. “It continues to rank favorably in our work, offers attractive inflation-protected yield and remains underowned by active managers.”

Read: Energy ETFs are the unloved relative to ‘outstanding’ gains as growth bets in stock market head for worst first half ever

The U.S. stock market is struggling to extend last week’s rally, which had snapped three straight weeks of losses for the S&P 500, Dow Jones Industrial Average and tech-heavy Nasdaq Composite.

U.S. stocks were trading down Tuesday afternoon amid fresh economic data showing a drop in consumer confidence, with the Dow
DJIA,
-1.42%

off 1.3%, the S&P 500 down 1.8% and the Nasdaq
COMP,
-2.71%

sliding 2.7%, FactSet data show, at last check.

Most of the S&P 500’s 11 sectors were falling, with consumer discretionary and information technology seeing the steepest drops in Tuesday afternoon trading. Energy, by contrast, stood out with sharp gains and was the only sector on the rise.

The Energy Select Sector SPDR Fund
XLE,
+2.28%

was up 1.4% Tuesday afternoon, bringing its gains so far this year to almost 35%, according to FactSet. Energy has soared while the S&P 500 has been beaten down more than 19% in 2022.

As for styles, the iShares S&P 500 Value ETF
IVE,
-1.03%

was down 1.2% Tuesday afternoon, faring better than the iShares S&P 500 Growth ETF
IVW,
-2.76%
,
which was off a sharp 2.8%, according to FactSet.

Small-cap stocks were also showing losses, with the iShares Russell 2000 ETF
IWM,
-1.48%

falling 1.9% Tuesday afternoon and the Vanguard S&P Small-cap 600 ETF
VIOO,
-1.30%

off 1.5%, FactSet data show, at last check.

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