Record injection of liquidity into technology funds is due to…

Record injection of liquidity into technology funds is due to…
Record injection of liquidity into technology funds is due to…

Bloomberg — At first glance, technology-focused stock funds just enjoyed a week of record inflows, the latest sign of the AI ​​craze. A look under the hood, however, showed that almost all the money went into a single fund – and it had little to do with the industry’s fundamentals.

Also read: All roads lead to Nvidia as tech sees record entries: BofA

The Technology Select Sector SPDR Fund (ticker XLK) attracted more than US$8 billion of fresh money during the week through Wednesday, accounting for the bulk of entries into the sector, according to data collected by EPFR. The fund also accounted for a third of total inflows into U.S. equities, the data shows.

The sudden rally came just before XLK’s widely watched quarterly rebalancing, in which It is estimated that more than $10 billion in Apple shares will be sold Inc. (AAPL) to make room for Nvidia Corp. (NVDA). The huge inflow is likely part of a trade in which the fund seeks to unload Apple shares that have appreciated in value, without incurring taxes, according to Todd Sohn, managing director of ETFs and technical strategy at Strategas Securities.

Record injection of liquidity from technology funds is due to “disorderly” rebalancingThe largest weekly attendance in history. Investors pour $8 billion into State Street tech ETF ahead of restructuring.

In a fairly common practice in the ETF industry, known as heartbeat trading, entries and exits are made through a market maker who, by design, exchanges assets for shares rather than conducting cash transactions. With a heartbeat operation, a friendly bank is pumping additional assets into a given fund so that additional withdrawals can be madeallowing more stock profits to be laundered.

“ETFs have the in-kind mechanism as their secret power,” Sohn said. “Every quarter, the flows data gets really messy because of this: huge numbers on both sides for a few days.”

State Street Global Advisor, which oversees XLK, did not immediately respond to an email seeking comment. The fund’s underlying benchmark index, designed by S&P Dow Jones Indices, is scheduled to do its quarterly rebalancing at the close on Friday.

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With Nvidia catching up to Apple and Microsoft Corp. (MSFT) in size over the past few weeks, the realignment in XLK holdings has piqued Wall Street’s interest at the prospect of weight additions and reductions that induce volatility in some of the technology companies most guarded in the world.

Thanks to diversification rules, XLK has held far fewer Nvidia shares for months despite a crushing market rally. The expected rebalancing entry provides a tailwind for the chip pioneer that is large by technical flow standards but modest for a company that has added trillions to its value. After a 174% rally this year through Tuesday, Nvidia shares have since fallen more than 6%.

According to Mohit Bajaj, head of ETFs at WallachBeth Capital, XLK is likely to see large outflows as the second leg of the heartbeat trade.

“There will be a refund that will hit soon, today or Monday,” he said.


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