Utilities stocks and related exchange traded funds look expensive as investors piled into the yield-generating asset in response to falling interest rates.
The Utilities Select Sector SPDR (NYSEArca: XLU) has increased 15.3% over the past three months and rose 31.1% over 2014.
After the recent surge in the utilities space, XLU is now showing a price-to-earnings ratio of 18.8 and a price-to-book of 1.8, according to Morningstar data. In comparison, the S&P 500 index has a 18.0 P/E and a 2.5 P/B.
Utilities outperformed while interest rates fell, providing investors with more attractive yields, reports Lawrence Lewitinn for CNBC. For instance, XLU has a 3.24% 12-month yield, whereas the 10-year Treasury note yields 2.17%.
Consequently, the recent rally in XLU has also pushed XLU above its trend channel, which indicates that the sector could see a short-term pullback to bring the ETF back within its normal range.
Specifically, looking at the five-year chart, XLU recently broke above its upper channel – a channel is the area between two parallel trendlines, or a measure of a trading range, with the upper trendline connecting price peaks and the lower line connecting lows.
“Obviously it’s a positive thing that it already broke out,” Steven Pytlar, chief equity strategist at Prime Executions, said in the CNBC article. “But in the very near term … oscillators or momentum indicators are very overbought, meaning that this is a sector that’s now at risk of reverting back to its prior trend. We wouldn’t view this current acceleration above that trend channel as sustainable.”