The Utilities Select Sector SPDR (NYSEArca: XLU) settled lower yesterday, but that was after touching new highs and XLU, the largest utilities exchange traded fund, is still up more than 20% year-to-date. That makes XLU easily the best performer among the sector SPDR exchange traded funds. Importantly, utilities ETFs’ runs may not be over.
XLU and rivals such as the Vanguard Utilities ETF (NYSEArca: VPU) and the Fidelity MSCI Utilities Index ETF (NYSEArca: FUTY) are among this year’s best sector ETFs as 2016 has turned into a perfect storm for supposedly boring utilities stocks.
Related: Utilities ETFs Keep Rising
Investors are clearly favoring defensive, low beta sectors, such as consumer staples and utilities this year. That is one point in favor of ETFs like XLU. A second point that bodes well for more utilities upside is the Federal Reserve.
No sector is as negatively correlated to rising interest rates as utilities, meaning the longer the Fed resists raising interest rates, the longer high-yielding utilities stocks and ETFs remain compelling destinations for yield-starved investors. The release of the June Federal Open Market Committee (FOMC) meeting minutes on Wednesday indicates the Fed may not be able to boost borrowing costs at all this year and that is boon for XLU and friends.
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