Are Utilities ETFs Saying Rates are About to Rise Again?

October 16th at 6:00am by Todd Shriber

Yields on 10-year U.S. Treasuries are up 3.1% in the past week, but at 2.72%, those yields still have a little way to go before touching the ominous 3% level.

Recent action in utilities ETFs could be a sign that U.S. yields are set to soar again, threatening an array of other income-generating sectors and asset classes such as consumer staples, master limited partnerships and real estate investment trusts. [Utilities ETFs Stung by Rising Rates]

On Monday, there was unusual volume in several U.S. utilities ETFs. For example, the iShares US Utilities ETF (NYSEArca: IDU) saw volume that was well above the daily average on Monday, according to data from ETF execution firm WallachBeth Capital.  [Chart Says Volume Soares in Utilities, Dividend ETFs]

Turnover in the First Trust Utilities AlphaDEX Fund (NYSEArca: FXU) was also unusually high on Monday.  [Volume High Again in Utilities ETFs]

The Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities ETF by assets, IDU and FXU were three of the worst six non-leveraged ETFs on Monday, according to the WallachBeth data.

Tuesday was not much more kind to utilities ETFs. The eighth-, ninth- and tenth-worst non-leveraged ETFs on the day were the Vanguard Utilities ETF (NYSEArca: VPU), XLU and IDU.

While volume was not unusual in those ETFs, FXU lost 1.2% on turnover that was more than five times its daily average on Tuesday.  Utilities ETFs have fought off rising rates since the start of this month. FXU. VPU and XLU are up an average of 1% while 10-year Treasury yields are higher by 2.8%.

Higher interest rates lead to higher borrowing costs for capital intensive utilities , often prompting speculation about the ability of the companies to continue paying or increasing dividends. When rates spiked roughly 60 points in the second quarter, utilities ETFs were the worst-performing sectors ETFs.

Utilities Select Sector SPDR