Sector ETFs that were plagued by tapering speculation were boosted in a big way Wednesday when the Federal Reserve announced no alterations will be made to its $85 billion-per-month asset-buying program known as quantitative easing. Few sectors did not benefit from the news and those that had previously been stricken by rising interest rates soared as 10-year Treasury yields plunged more than 5%.
ETFs tracking emerging markets, U.S. homebuilders and gold mining companies were among the biggest percentage gainers Wednesday after the Federal Reserve decided not to pare its purchases of Treasuries and mortgage-backed securities. Utilities ETFs belong on that list as well. [Fed No Tapering Fires up Gold, Housing ETFs]
As tapering chatter forced 10-year yields higher by nearly 31% over the three-month period leading up to Wednesday, utilities stocks reminded investors the sector is indeed sensitive to higher interest rates. Previously prized by income investors for low correlations to the broader market, scant volatility, dependable payouts and yields that easily topped 10-year Treasuries, utilities ETFs like the Utilities Select Sector SPDR (NYSEArca: XLU) basked in the glow of the Fed’s easy money and low interest rate policies. [Utility ETFs for Higher Yields]
In the second quarter, XLU and rival utilities ETFs were plagued by the start of rising rates and the start of the cyclical rotation out of more defensive sectors to higher beta fare. In June, Morningstar noted “if the spread between the average target return and the 10-year Treasury rate reverts to its 20-year mean of 6%, earnings for many utilities could fall 10%-20%.” [Interest Rates Hit Utilities ETFs in Q2]
It looks the Fed came to the rescue of the utilities sector. Over the three-month period ending September 17, XLU, the Vanguard Utilities ETF (NYSEArca: VPU) and the iShares U.S. Utilities ETF (NYSEArca: IDU) were down an average of 1.5%.
Those ETFs kicked those losses to the curb Wednesday as XLU climbed almost 3%, a big move for a utilities fund, on volume that was nearly triple the daily average. IDU and VPU also each gained about 3%. VPU is the cheapest utilities ETF with an annual expense ratio of 0.14% while XLU is the largest with $5.34 billion in assets under management.
For now, it looks like the Fed has given conservative income investors the green light to return to one of their favorite sectors without the threat of capital losses at the hands of rising interest rates.
Utilities Select Sector SPDR
ETF Trends editorial team contributed to this post.