Utilities sector exchange traded funds were powering up Friday as investors turned defensive in response to lower-than-anticipated jobs growth over August.
The Utilities Select Sector SPDR (NYSEArca: XLU), Vanguard Utilities ETF (NYSEArca: VPU) and iShares U.S. Utilities ETF (NYSEArca: IDU) were all up a little over 1% Friday. Year-to-date, XLU has gained 15.4%, VPU rose 14.9% and IDU increased 14.9%.
The utilities sector strengthened after the government revealed that the economy only added 142,000 jobs in August, the first month since January in which the economy failed to add at least 200,000 jobs, the New York Times reports.
Buoyed by the poorer-than-anticipated job numbers, electric and gas utilities extended the sector’s rally. The S&P 500 utilities index is the second best performing sector this year behind health care.
Utilities, which are sensitive to interest rates, also rallied on the prospect that the payroll figures would moderately diminish expectations of a Federal Reserve rate hike by March. Barclays strategists note that the utility sector is the most negatively correlated sector to higher interest rates, Financial Times reports.
“While the data is a significant disappointment, most participants will want to place the numbers in the context of a string of strong numbers,” Alan Ruskin, a strategist with Deutsche Bank, said in the FT article. “Nonetheless, this is the kind of data that staves off risks of a more hawkish Fed at the September Federal Open Market Committee.”
In response to expectations for an extended low-rate environment, utilities and other dividend-paying options with more attractive yields are strengthening. XLU has a 3.41% 12-month yield, VPU has a 3.27% 12-month yield and IDU has a 2.97% 12-month yield. [3 Yield-Generating, Utilities ETFs for Volatile Times]
Over the long-term, however, higher interest rates will make fixed-income securities more attractive on a relative basis. Consequently, bond-esque, dividend-paying stocks like utility companies will become less enticing.
Utilities Select Sector SPDR
For more information on the utilities sector, visit our utilities category.
Max Chen contributed to this article.