Still, investors should closely monitor interest rate action as it pertains to the utilities sector.
“Since 2000, when interest rates began a secular decline, utilities companies have seen their investor bases broadened by those also seeking price appreciation in addition to income generation and reliability,” according to Goldsborough. “Now, Morningstar’s equity analysts believe that investors currently are pricing in 4% U.S. Treasury yields, so we don’t expect substantial moves downward from utilities if rates hit that level. At the same time, another way utilities companies could continue their recent outperformance would be if Treasury rates stabilized close to 3%.”
Last year serves as a good harbinger for what investors can expect out of the utilities sector when rates rise. XLU and VPU posted an average gain of 13.7% while the S&P 500 surged 32.3%. That is to say utilities stocks do not necessarily fall when rates rise, but they the sector can indeed be a laggard as rates move up.
Utilities Select Sector SPDR
Tom Lydon’s clients own shares of SPY.