Traders Abandoning Hedges on Utilities ETF

On a year-to-date basis, the Utilities Select Sector SPDR (NYSEArca: XLU) has posted a market-lagging 4.3% loss, but since the start of the third quarter, things have been much different for the largest utilities ETF.

Since July 1, XLU has surged 8.4%, easily the best performance among the nine sector SPDR ETFs, as financial markets have begun to seriously consider the possibility that the Federal Reserve can forgo raising interest rates this year. Speculation that the Fed can legitimately skip out on a rate hike in 2015 is also prompting some traders to abandon XLU hedges.

“Trading in the options on the Utilities Select Sector SPDR exchange traded fund, however, shows a dramatic drop in hedging activity since the end of June. Open contracts are nearly equally spread between bullish calls and bearish puts. This represents about the lowest level of open positions in puts relative to calls this year, down significantly from January when there were six puts open for each open call,” reports Saqib Iqbal Ahmed for Reuters.

Traders may be dropping protective hedges on XLU, but data say the opposite is happening when it comes to direct ownership of the ETF itself. Since the start of the current quarter, XLU has added nearly $658 million in new assets, one of the top totals among all sector ETFs. [ETF Chart of the Day: Utilities Light Up]

Recent data suggest traders have been betting the Fed will boost borrowing costs at its September meeting, but some rate-sensitive asset classes say otherwise. Actually, Treasury yields say otherwise. The yield on the benchmark 10-year Treasury has tumbled more than 12% over the past month and now resides at two-month lows.