ETFs Bleed $4B as Rate Hike Bets Surge to 87%

U.S. equity exchange-traded funds (ETFs) experienced significant outflows of over $4 billion this week, as investors increasingly anticipate a Federal Reserve interest rate hike on Wednesday.

The expectation of a rate hike, which surged to around 87% from 59% the previous week following producer and consumer inflation reports, led to increased borrowing costs and reduced the value of future profits for tech companies. This had an outsized impact on equity ETFs sensitive to interest rates, including those tied to the consumer discretionary sector.

The benchmark S&P 500 index fell nearly 1% over the holiday-shortened week, snapping a two-week winning streak. The increase in rate hike bets added to the ongoing rout in government bonds, resulting in strong weekly advances in U.S. Treasury yields. The 10-year yield rocketed 19.1 basis points for the week to end at 4.975%, nearing the key 5% level.

Net outflows across the three largest funds tracking the S&P 500 were $3.23 billion, primarily due to a massive $31.11 billion exodus from the iShares Core S&P 500 ETF. The Invesco QQQ Trust, which tracks the tech-heavy Nasdaq 100, saw outflows of $588.6 million this week, reversing from an inflow of $2.62 billion the previous week.