Investors Pull Over a Billion Out of Major Financials ETF

Fears of a struggling US stock market reared their ugly head last week when the Financial Select Sector SPDR Fund (ARCA:XLF) saw its biggest outflow in over 10 years.

According to Bloomberg, the $24-billion fund saw $1.8 billion in outflows last week, a number the firm hasn’t seen since July 2008. This year alone, Financial Select has had investors withdraw $4.6 billion.

Monday (December 17) proved to be a rough day across the board as the S&P 500 (INDEXSP:.INX) closed at its lowest level in 14 months, with shockwaves sent across the border as Canada’s S&P/TSX Composite Index (INDEXTSI:OSPTX) hit a two-year low.

The news comes just days before 2018’s fourth anticipated interest rate hike from the US Federal Reserve, expected to take place on Wednesday (December 19).

Comments from DoubleLine Capital Chief Executive Jeffrey Gundlach contributed to the S&P’s struggle after he told CNBC that US equities are in a long-term bear market on Monday.

“I think it is a bear market. I think we’ve had the first leg down and the second leg down is usually more painful than the first leg down,” Gundlach said.

“I think this lasts a long time. It has a lot to do with the fact that, I believe, that we’re in a situation that is … highly unusual — that we’re increasing the budget deficit so spectacularly so late in the cycle while the Fed is hiking interest rates,” he continued.

The executive went on to bash passive investing such as index funds and exchange-traded funds (ETFs), saying it has “reached mania status” among global stock markets.

“I think in fact that passive investing and robo-advisors … are going to exacerbate problems in the market because it’s herding behavior,” Gundlach told CNBC. “I wouldn’t advise anyone to be a passive investor. My strongest advice is to not invest in passive U.S. equity funds.”

ETFs are a mixed bag of stocks, commodities and bonds that can be traded on global exchanges. Financial Select’s holdings include industry heavyweights like Berkshire Hathaway (NYSE:BRK.B), JP Morgan Chase & Co. (NYSE:JPM) and Bank of America (NYSE:BAC).

While Gundlach’s remarks may have been the catalyst to spook some investors, the sentiment behind his words can also be seen in the numbers.

According to CNBC, both the Dow Jones Industrial Average (INDEXDJX:.DJI) and the S&P 500 — two of the biggest stock indexes in the US — are en route to their worst December performances since 1931, or in more startling terms, the Great Depression.

December of 1931 saw the S&P 500 drop 14.5 percent and the Dow plunge 17 percent; meanwhile, the S&P and Dow are currently down 7.8 percent and 7.6 percent for the month, respectively.

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Securities Disclosure: I, Olivia Da Silva, hold no direct investment interest in any company mentioned in this article.