One of the biggest market rallies in recent years is beginning to exhibit some mixed signals as exchange-traded funds (ETFs) continue to experience inflows at the same time that mutual funds are experiencing outflows. ETF inflows have already topped $70 billion since the start of the year while mutual funds, bond and equity funds lost a record $152 billion in December alone. Perhaps even more perplexing, while ETFs tracking sectors like retail, semiconductors, and oil & gas are seeing double-digit gains, they are also among the most heavily shorted sectors in the market, according to ETF Trends.

The SPDR S&P Retail ETF (XRT), VanEck Vectors Semiconductor ETF (SMH), and SPDR S&P Oil & Gas Exploration & Production ETF (XOP), have all made those double-digit gains but are also attracting significant bets against their future performance. The XRT, which includes 94 key retail stocks, is currently being sold 525% short; the SMH, which tracks the stocks of the top 25 global chipmakers, is sold 140% short; and the XOP, which includes 64 drilling and refining stocks, is being sold 117% short, according to CNBC.

3 ETFs That May Keep Rising

  • SPDR S&P Retail ETF; retail industry; +10. 6% YTD.
  • VanEck Vectors Semiconductor ETF; semiconductor industry; +34.9%
  • SPDR S&P Oil & Gas Exploration & Production ETF; oil & gas E&P industry; +19.9% YTD.

Source: CNBC; CNN Money, as of 4 p.m. EST 04/19.

What It Means for Investors

The divided nature of today’s market speaks to both the growing investor preference for ETFs over mutual funds but also the degree of uncertainty hanging over the recent bear rally. “I think you have a bifurcation of behavior among investors today,” ETF Trends CEO Tom Lydon told CNBC. “ETF investors seem to be more on the buy and hold side. Fund investors, as we know, very emotional buying and selling—maybe at the wrong time.”

New products in the ETF space are also providing investors with hedging tools previously only available to institutional traders and hedge funds. Combining those tools with uncertainty surrounding where markets may be heading next helps to explain the extensive short selling. “People seem to be a little bit more bearish…You have a big short position, it means somebody’s hedging, or a lot of somebodies are hedging,” Adviser Investments chair Dan Wiener told CNBC.

But despite the bearish sentiments, there are reasons to think some of these sectors may continue to outperform. In the oil and gas sector, past data suggests the recent six-week rally in oil prices should lead to further price rises, helping to further boost the shares of oil and gas companies. An analysis by CNBC showed that five previous six-week rallies in the price of oil since 2010 were followed by a 2.61% rise in the price of oil and 1.25% rise in the S&P 500 over the following month.

The retail sector has benefited from strong consumer spending over the past year. While retail sales declined 0.2% in February they are expected to jump back up by 0.9% in March. However, with economic growth slowing, analysts are sceptical whether consumer confidence will hold up throughout the year. If retail spending can hold up, retail stocks should continue to perform well.

Looking Ahead

With stocks rallying back to near all-time highs, investors have definitely become more cautious amid signs of slowing economic growth. If the rally can push higher and break past those previous highs, it may be enough to restore investor confidence. However, if they don’t, any slight pullback could trigger a bigger selloff, playing right into the short sellers’ hands.