Utilities ETFs enjoyed a big rally last Wednesday after the Federal Reserve surprised markets by electing to continue its $85 billion a month worth of bond buying unabated. Interest rates have cooled off in September but utilities ETFs could come under pressure again if Treasury yields resume their rise.
Utilities were the worst-performing sector from April 30 through August 31 when the yield on the 10-year Treasury note rose from 1.760% to 2.825%, says Sam Stovall, chief equity strategist at S&P Capital IQ. During that period, the S&P 500 gained 2.2% in price while utilities shed 10.4%. [Bernanke Turns Lights on for Utilities ETFs]
“Even though the performances for the market and sectors were eye-opening (especially for the investors in these high yielding, defensive groups), they were not inconsistent with history,” Stovall said in a note Monday.
In fact, since 1970, utilities have been the worst-performing sector during months in which the yield on the 10-year Treasury note was rising. The data illustrates “that the cyclical sectors seemed to take the rise in rates in stride, while the more defensive, higher yielding sectors, reacted poorly,” according to S&P Capital IQ.
Technical analyst Ralph Acampora on Monday said eight out of 10 S&P sectors registered new highs during the September rally. Only telecom and utilities failed to make new highs this month.
Utilities Select Sector SPDR (NYSEArca: XLU) is up 10.6% year to date compared with a gain of 21.8% for the S&P 500, according to Morningstar.
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