It almost seems trite to say that one year’s leading sector is destined to be the following year’s laggard, but utilities sector doubters might be apt to say that sleepy group is unlikely to repeat its impressive 2014 performance in 2015.
The Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities exchange traded funds, surged 24.4% in 2014, more than doubling the 11.4% gained by the S&P 500. XLU also edged the Health Care Select Sector SPDR (NYSEArca: XLV) for top honors among the nine sector SPDR ETFs. [Meet This Year’s Best Utilities ETF]
XLU’s stellar 2014 showing was aided in large part by a 28.3% decline by 10-year Treasury yields. With many market strategists betting on Treasury yields climbing in 2015, XLU and rival utilities ETFs may seem vulnerable heading into the new year. While a rate hike by the Federal Reserve is not a foregone conclusion (just review the predictions made at the end of 2013 for reference), charts indicate investors should approach XLU with some caution to start 2015.
“When it comes to juiced up performance in 2014, Utilities come to mind,” said Chris Kimble of Kimble Charting Solutions. “This strong rally has XLU up against 5-year channel resistance, with momentum lofty and it could be creating a bearish wick at these key price point.”
With that cautionary technical tale comes caution on the fundamental side as well. Utilities stocks are pricey and although that is usually the case, the sector is now expensive relative to its historical standards.
“Based on data compiled by FactSet, utilities trade at roughly 18 times forward expected earnings. That’s even higher than its previous peak of 17.2 in May 2007,” reports Lawrence Lewitinn for CNBC.
Only the consumer staples and discretionary sectors are currently more expensive than utilities. Still, the XLU and the broader utilities sector have their supporters.
XLU added over $1.7 billion in assets last year and in December, it was noted that XLU’s relative strength when measured against the S&P 500 was flirting with a breakout, one that has since been confirmed. That could signal a potential rally for utilities in 2015 as well. Additionally, a breakout would also confirm the low rates thesis that Treasury yields will remain low, pushing investors to alternative sources for income.
Utilities Select Sector SPDR
Chart Courtesy: Kimble Charting Solutions