Investors are showing signs of confidence in the economy's recovery, flooding into early cyclical sectors like industrials and consumer discretionary. But the rebound story isn't following its usual script. Concerned investors are also diving into Treasury Inflation-Protected Securities (TIPS) and taxable bond funds to preserve capital.

So far this year, industrial ETFs are winning the race, up slightly more than 8.2% through March 10. Financials are in a close second, returning 7.8% so far this year. The sector has benefited from investors' growing preference to invest in ETFs as a way to minimize their exposure to single stocks, says Dan Dolan, director of wealth management strategies for Select Sector SPDRs.

The strategy has certainly paid off for the sector. One year after the market hit bottom on March 9, 2009, financial ETFs had posted a gain of 147%. Consumer discretionary ETFs rounded out the top three performers, up 7.3%.

DEFENSE DOWNTURN

As broader markets are rebounding, more defensive sectors have predictably lagged. Flows into utilities have fallen 3.5%, making them the weakest performers so far this year. Don't give up on the utilities sector just yet, though, Dolan says, especially since it is the highest-yielding category in the S&P 500.

"As investors try to search for yield-and the bond market hasn't been delivering much of that these days-they may eventually turn to utilities as a bond substitute," he says.

Technology also lagged, dropping 1.7% through March 10, though it is coming off an impressive 2009 when it was a top performer, says John Gabriel, an ETF analyst for Morningstar. But it would be a mistake to count tech out, thanks to its strong track record over the past year. It boasts a trailing 12-month return of more than 73% and plenty of companies with strong balance sheets.

Despite their confidence, investors have actually been pulling money out of riskier equity ETFs and putting it into safer bond funds. Through the end of February, equity ETFs bled $18.5 billion.

Some of that money is going toward fixed income, which took in $5.4 billion in net new assets during that same period. Fixed-income is up 5.1% YTD through March 10. "The need to preserve capital and the need to generate income as the population ages becomes more and more important," Dolan says. "There is a more conservative investor base out there."

SAFETY PLAYS

Investors are also loading up on TIPS. By the end of February, the iShares Barclays TIPS Bond Fund had net new assets of $1.5 billion. People are concerned about potential interest rate hikes, Gabriel says. "They are preparing their portfolios for a bout of inflation."

Taxable bond ETFs are also benefiting from investors' search for a safe place to put their money. The sector took in $5.3 billion in net inflows through the end of February.

The picture is mixed for emerging-market ETFs, which had turned in impressive performances throughout 2009, as the U.S. was still getting into recovery mode. But investors are starting to pull their funds away from China this year as the country's government has begun tightening credit and imposing reserve requirements on its banks to avert a bubble in its domestic markets. The iShares FTSE/Xinhua China 25 Index has seen outflows of $1.67 billion through the end of February. The fund has had an incredible run, though, with a one-year return of 111.5% as of March 10.