Utilities ETF Down 9% in May as Interest Rates Rise

May 29th at 10:36am by John Spence

Utilities Select Sector SPDR (NYSEArca: XLU) was one of the best-performing sector ETFs during the first four months of 2013 but that trend has reversed in May with a vengeance. The fund down is about 9% so far this month.

Blame rising interest rates and expectations the Federal Reserve may scale back on quantitative easing (QE) if the economy continues to slowly improve. [Treasury Bond ETFs Pressured by Fed, Improving Data]

XLU is the worst sector this month and it’s not even close. Through Tuesday, the utilities ETF was trailing the S&P 500 by more than 11 percentage points, according to StockCharts. The fund was off 1.5% on Wednesday morning.

Additionally, XLU has outperformed the S&P 500 for only three days the entire month. Another defensive sector ETF, Consumer Staples Select Sector SPDR (NYSEArca: XLP), is also trailing the S&P 500 in May. [Utilities ETFs Showing Signs Of Wear]

“Utilities, a breakout sector earlier in the year, have fallen by the wayside now that Treasury yields are back on the rise,” reports Wallace Witkowski at MarketWatch.

A chart of the utilities sector and the yield on the 10-year note are “mirror images,” said Jonathan Arnold, a Deutsche Bank analyst, in the article. “Marginal buyers [of utilities] care more and more about yield,” Arnold said. “I like to think it’s the closest thing in equities to a bond.”

If interest rates finally do see a sustained rise, income investors could start to migrate back to bonds and away from dividend-paying stocks.

Russ Koesterich, BlackRock’s chief investment strategist, this week warned investors to be cautious about those areas of the financial markets where valuations have become more distorted by unusual monetary conditions, Barron’s reports. These sectors include dividend payers such as the utilities sector, Koesterich noted.

The charts below show the relative performance of XLU, the utilities ETF, against the S&P 500.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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