Thematic Thursday: Inflation Is Back, but Sector Flows Still Say Technology First

The macro backdrop has taken a distinctly more inflationary turn, but sector leadership has not yet rotated in the way investors might normally expect. Oil has moved back above $100, Treasury yields have surged, September business surveys point to stronger growth and rising cost pressures, and central banks are again confronting the possibility that policy may need to remain tighter for longer. The 10-year Treasury yield has risen roughly 25 basis points in two weeks and about 35 basis points over the past month, while the dominant market narrative has shifted toward the interaction between stronger growth, higher energy prices and renewed inflation risk. Yet the latest thematic ETF flow data do not show a broad rotation into traditional inflation beneficiaries such as Energy, Materials and Financials. Instead, investors are continuing to pour money into semiconductors and selected growth themes while using precious metals as a direct inflation hedge. The result is an unusual sector setup: Technology remains the market’s preferred source of growth, while the inflation hedge is largely bypassing traditional sector proxies.

The clearest sector signal continues to come from Information Technology. Semiconductor ETFs attracted approximately $2.59 billion over the past week, led by roughly $2.19 billion into SOXX and $382 million into SMH, while both funds posted strong gains. Vanguard Information Technology ETF VGT itself attracted approximately $445 million while gaining 3.86%. That is unusually strong confirmation given the sharp backup in bond yields. Normally, rapidly rising long-term yields challenge Technology because higher discount rates reduce the present value of long-duration earnings, but investors are currently looking through that pressure because the AI infrastructure cycle remains strong enough to offset it. The news flow reinforces that view: Meta is expanding its AI hardware ecosystem, Microsoft plans more than $10 billion of additional cloud and AI infrastructure investment in the Gulf, TSMC is reportedly considering foundry price increases, and SoftBank has raised expensive high-yield financing to fund further AI investment. Within Technology, however, the leadership is becoming more selective. Cybersecurity ETFs CIBR, HACK and BUG collectively attracted more than $600 million, while broad software ETF IGV lost roughly $371 million. Investors are still willing to pay for areas where AI spending translates into tangible infrastructure demand or mission-critical corporate spending, but they appear less willing to own long-duration software exposure indiscriminately. For VGT, the message remains constructive, but semiconductor, AI infrastructure and cybersecurity exposure are doing most of the work.

The inflation trade looks very different inside Materials. Natural-resource ETFs attracted approximately $749 million over the past week, but most of that demand went directly into precious metals rather than commodity-producing equities. GLD attracted approximately $679 million and SLV another $270 million, while gold-miner ETF GDX lost roughly $126 million and copper-miner ETF KOPX lost another $78 million. That divergence is important for interpreting VAW. Investors clearly want inflation protection, but they do not yet appear convinced that the best way to obtain it is through mining and materials stocks. Bullion provides direct exposure to inflation, monetary uncertainty and geopolitical stress, while miners also face wage, fuel, financing and execution costs that can worsen during an inflation shock. Strong gold demand should therefore not automatically be read as bullish confirmation for the broader Materials sector. For VAW to become a more convincing inflation trade, flows would likely need to broaden from bullion into miners, metals producers and other commodity-sensitive equities. That has not happened yet.

Energy presents an even more striking disconnect. Oil is above $100, Middle East supply remains uncertain and the Strait of Hormuz continues to dominate energy-market risk. Saudi Arabia and other Gulf producers are finding alternative ways to move barrels, but at greater cost, while policymakers in Washington continue to debate potential restrictions on diesel exports. Yet thematic investors are not chasing Energy equities. Legacy energy ETFs recorded approximately $64 million of weekly outflows, with XOP losing about $82 million, while OIH received only around $20 million. Midstream and MLP strategies attracted roughly $33 million, but those flows remain small relative to the billions entering Technology. That sends a meaningful signal for VDE. Higher oil prices are improving near-term cash flows for producers, but investors appear more concerned about the second-order consequences of the price spike: demand destruction, political intervention, tighter monetary policy and slower global growth. In other words, the commodity is behaving like an inflation hedge, but the equity sector is not yet receiving comparable sponsorship.

Financials are also failing to confirm the traditional inflation playbook. The Finance/Fintech thematic group suffered approximately $237 million of weekly outflows, led by roughly $214 million leaving KBWB, while insurance ETF KIE lost another $78 million. That weakness matters for VFH because higher rates are not automatically positive for banks when the move is accompanied by rising volatility, tighter financial conditions and higher funding costs. The current rise in yields is being driven in part by fears that stronger growth and inflation could force additional Federal Reserve tightening, and New York Fed President John Williams said Thursday that it is reasonable for markets to expect another rate increase before year-end, while other global central banks have also adopted a more hawkish tone. That environment can pressure loan demand, credit quality and bank balance sheets even if nominal rates rise. The flow data therefore argue against treating Financials as an automatic beneficiary of the inflation regime.

Health Care, by contrast, is attracting selective contrarian interest. Biotechnology ETFs brought in more than $700 million over the week despite declining approximately 1.7% on average, with XBI receiving roughly $555 million and ARKG adding another $133 million. Much of that buying occurred during weakness, suggesting investors are accumulating rather than chasing momentum. For VHT, the read-through is positive but should not be overstated because large-cap pharmaceuticals, managed care, medical devices and biotechnology respond to different drivers, and XBI represents a much more speculative and rate-sensitive slice of the sector. Still, the flows show that investors are willing to take duration risk selectively where valuations and company-specific catalysts appear compelling. Recent deal activity, including Eli Lilly’s announced $3.35 billion collaboration with China’s InnoCare, reinforces that interest. Health Care therefore looks less like an inflation trade and more like a source of diversification away from the increasingly crowded AI complex.

Industrials sit at the intersection of several powerful themes — AI infrastructure, electrification, reshoring, defense, power demand and physical capital spending — but the flow evidence remains mixed. Broad infrastructure ETFs attracted only modest capital, with PAVE losing roughly $52 million, partially offset by inflows into IGF and IFRA. Electrification funds such as GRID and VOLT performed somewhat better, and robotics strategies also attracted selective demand, but defense flows remained roughly flat to negative despite elevated geopolitical risk. For VIS, the implication is that investors still prefer the Technology companies supplying the AI boom over the broader industrial ecosystem needed to build it. That could change as the capex cycle broadens. Data centers require power equipment, cooling systems, construction, electrical infrastructure, transportation and enormous physical investment. If AI spending migrates further from chips into the surrounding buildout, Industrials could become one of the most important secondary beneficiaries. The current flows suggest that process may be beginning, but it is not yet a broad sector rotation.

The rise in Treasury yields creates the clearest headwind for traditional rate-sensitive sectors. VNQ fell about 1.7% over the week, although REIT ETFs continued to attract modest inflows, suggesting some investors are willing to buy weakness even as higher financing costs and bond competition pressure valuations. Consumer Discretionary faces a similar challenge through a different channel. Higher energy costs reduce household purchasing power, while elevated mortgage and auto-financing rates make large purchases more expensive. Interestingly, homebuilding ETFs XHB and ITB still attracted approximately $102 million and $54 million respectively during the week, another example of investors selectively buying weakness rather than embracing a broad cyclical rotation. Utilities face a comparable push-pull: long-term power demand from data centers and electrification remains supportive, but higher bond yields continue to challenge their relative valuation appeal. Consumer Staples remain defensive but similarly exposed to the pressure that higher yields place on bond-proxy sectors.

The most important conclusion from this week’s thematic flow data is that investors have not yet reorganized portfolios around inflation. Instead, the market is preserving its existing Technology leadership while building protection around it. The strongest demand remains concentrated in semiconductors, AI infrastructure and cybersecurity, while precious metals are attracting capital as direct protection against inflation, geopolitical stress and bond-market instability. Biotechnology is also attracting selective contrarian buying. What is conspicuously absent is broad flow confirmation from the sectors that would normally be expected to lead an inflationary rotation. Energy equities are not confirming oil’s strength, Materials equities are not confirming gold’s strength, Financials are not confirming higher rates, and Industrials are participating only selectively despite the capital-spending boom.

For sector investors, that distinction matters. The market’s message is not yet “sell growth and buy inflation beneficiaries.” It is closer to “keep owning the AI growth engine, but hedge the inflation risk around it.” That leaves VGT with the clearest thematic-flow support, while VDE, VAW, VIS and VFH remain potential secondary beneficiaries if the inflation trade broadens from commodities into equities. If those sectors begin to attract sustained inflows while Technology leadership persists, the market would be moving toward a more durable inflation-led sector rotation. For now, the rotation remains incomplete.

Sector Read-Through

Sources

ETFThemes.com Thematic ETF Performance and Flow Database, September 24, 2026.

ETFThemes.com Morning Headline Pack, September 24, 2026.

S&P Global Market Intelligence, September 2026 U.S. Flash PMI.

Federal Reserve and Federal Reserve Bank commentary, September 2026.

Company announcements and current market reporting referenced in the ETFThemes.com Morning Headline Pack.

Disclaimer:  This article is for informational and educational purposes only and does not constitute investment advice, an offer to buy or sell securities, or a recommendation of any investment strategy. ETF holdings, performance and fund flows can change rapidly. Investors should consider their objectives, risk tolerance and individual circumstances before investing.