Last year brought a brutal confluence of factors to utilities stocks and the relevant exchange traded funds.
At the sector ETF level, investors favored cyclical fare as evidenced by the fact that the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY) and the Industrial Select Sector SPDR (NYSEArca: XLI) were the two best of the nine sector SPDR ETFs. [State Street Lowers Fees on Sector ETFs]
Add to that, 10-year Treasury yields spiked, pressuring previously favored income-generating groups, including utilities. The Utilities Select Sector SPDR (NYSEArca: XLU), including paid dividends, gained just 13% percent last year, just half that of the next worst SPDR, less than half the S&P 500’s gains and not even a third of the returns offered by XLY and XLI. [Beware Issues With Utilities ETFs]
Things have been much different, in a good way, for utilities ETFs in 2014. Treasury yields have declined and a rocky January for the broader market has XLU locked in a tight battle with the Health Care Select Sector SPDR (NYSEArca: XLV) to be this year’s best of the nine SPDRs. XLU’s may just be getting started.
XLU “is already up about 9% from its early January low and for this sector that is a hefty move. But last week, it rose above the top of an eight-month trading range. And for the first time in close to a year, money is flowing in, according to on-balance volume. This indicator measures volume on rallying days versus volume on declining days: If the former is stronger we surmise that demand is beating supply,” writes Michael Kahn for Barron’s.
Southern Co. (NYSE: SO) and PG&E (NYSE: PCG) were highlighted by Barron’s as two of the more attractive utilities stocks because the two are residing not far off their 52-week lows, which could mean more upside for investors. Those two stocks combine for 11.5% of XLU’s weight, according to State Street data.
Overall, XLU, the largest utilities by assets with $5.3 billion, is home to 32 stocks. The ETF has a dividend yield of 3.62%, 92 basis points where 10-year Treasury yields closed Tuesday.
Utilities Select Sector SPDR