It is still the top performer of the nine sector SPDR exchange traded funds this year with a 12% gain, but the Utilities Select Sector SPDR (NYSEArca: XLU) has fallen on hard times this month.
The same goes for rival utilities ETFs, though the declines for these once high-flying ETFs are receiving scant attention. XLU, the largest utilities ETF, has lost almost 4.4% since May 1. The iShares U.S. Utilities ETF (NYSEArca: IDU) and the Vanguard Utilities ETF (NYSEArca: VPU) are each down almost 4% since the start of May. [Utilities ETFs for Defense]
That is a sharp reversal of fortune from what was seen in the first four months of 2014 when XLU surged 16.5% while IDU and VPU posted an average gain of 15.5%. Several factors make the May woes being endured by utilities ETFs potential alarming.
First, the S&P 500 has traded slightly lower this month, indicating low beta utilities, which have one of lowest correlations to the broader market, have betrayed conservative investors. [Other ETFs Benefit From Utilities Strength]
Second, 10-year Treasury yields are down almost 4%. That should be a boon for rate-sensitive utilities stocks and ETFs, which are often framed as bond alternatives.
But even as the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) and the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) have each gained about 1% this month, XLU and friends have wilted.
Then there is seasonality. Whether or not investors subscribe to seasonal trends is a debate for another day. The fact is XLU is faltering in May, ahead of June, the month in which XLU is historically the best performer of the nine SPDRs.
Investors continue to allocate money to utilities ETFs, perhaps confirming the notion that the sector’s recent struggles have gone unnoticed by some.
“XLU $300 million for instance in recent sessions despite the fund falling below its 50 day MA inside of the last two sessions,” Street One Financial Vice President Paul Weisbruch said in a note out Tuesday. “Investors have traditionally been attracted to Utility stocks as lower volatility names that have historically had attractive yields, and that still looks to be the case today as XLU’s yield for example is 3.41%.” [Chart of the Day: Utilities ETFs]
Utilities Select Sector SPDR
Tom Lydon’s clients own shares of TLT.