ETFs following the U.S. utilities industry have outperformed the market by wide margin since the beginning of April with nervous investors favoring defensive sectors and dividends.
However, some analysts think investor fears over the Eurozone debt crisis are overblown and that utilities have been bid up to overvalued territory.
“The love for dividends and love for the bear trade is in many ways a form of insanity when growth expectations are so disconnected because of the negative narrative,” wrote Pension Partners chief investment strategist Michael Gayed in a recent MarketWatch article.
He notes the utilities sector has a forward price-to-earnings (P/E) ratio that is higher than technology. “This is illogical when we are not in a recession in the U.S. based on current data, and when we are not in a 2008-like environment,” Gayed writes. [Utilities ETFs Outperforming on Stability, Dividends]
Utilities Select Sector SPDR (NYSEArca: XLU) has a forecasted fiscal year P/E ratio of 15.1, compared with 12.6 for Technology Select Sector SPDR (NYSEArca: XLK), according to State Street Global Advisors, which manages the ETFs.
The utility ETF has a dividend yield of nearly 4%.