With concerns about rising interest rates creeping back to the forefront of investors’ minds, the Utilities Select Sector SPDR (NYSEArca: XLU) is lower by more than 3% over the past month in what could be a sign that sector investors are betting the Federal Reserve will raise interest rates following its December meeting.
Over the long-term, the utilities sector could continue to generate steady profits as the industry expands operations. According to S&P Capital IQ Equity Analyst Christopher Muir, the utilities industry is experiencing high levels of capital spending on regulated capital spending through infrastructure replacement, new transmission and distribution facilities, and regulated power plants. Additionally, unregulated spending will focus on natural gas-fired combined-cycle power plants and investments in solar and wind.
Still, 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]
Although utilities stocks and ETFs are vulnerable to the notion of higher interest rates, how the group performs after the Fed actually boosts borrowing cost is another, surprisingly positive matter.
“Declining utility stocks are a harbinger of rate increases as the sector tends to underperform the broader market when rates are rising, Kit Konolige, a Bloomberg Intelligence senior utilities analyst, said by phone Nov. 16. Raising rates “may well become appropriate” at their December meeting, the FOMC said in minutes of the October meeting released Wednesday,” reports Jim Polson for Bloomberg.