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.”
Nevertheless, the overall trend is remains positive for XLU. While the sector and ETF could pullback over the short term, the asset still maintain its forward momentum.
“Even if it does revert back to that prior trend, we would have to remain positive just on this ongoing growth that the chart is describing,” Pytlar added. “But it’s not something we would be buying at these prices today, either.”
Utilities Select Sector SPDR
For more information on the utilities sector, visit our utilities category.
Max Chen contributed to this article.