Investors looking for stout returns from sector exchange traded funds this year have not needed to get too adventurous. In fact, downright boring has worked just fine as highlighted by the nearly 13% returned by the Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities exchange traded fund.
Utilities sector fundamentals remain strong. However, utilities have been underforming due to the sector’s inverse relationship to rising interest rates – when rates rise or investors fear higher rates, utilities typically underpeform, and vice versa.
Most investors view utilities as a reliable, income-generating asset that exhibit some bond-like characteristics. As interest rates declined, the sector appealed to many income investors for its relatively higher yields.
Further boosting the allure of utilities stocks and ETFs like XLU is the Federal Reserve’s ongoing reluctance to raise interest rates. The Fed passed on that opportunity earlier this month and though there is chatter that could change next month, current bond market data indicate many bond traders are not betting on an April rate hike.
“One portfolio manager thinks it might be time to buy the utilities and get a nice dividend yield,” reports CNBC. “Skip Aylesworth, portfolio manager of the Hennessy Gas Utility Fund, told CNBC’s “Power Lunch” that in a lackluster U.S. economy, it may be prudent to invest in safety.”
Some investors see opportunity with rate-sensitive assets such as XLU and real estate ETFs, noting that 10-year yields are overbought and sentiment against the likes of XLU is at bearish extremes, which could create opportunity from the long side with the utilities sector. [Rethinking Rate Sensitive ETFs]