Ten-year Treasury yields are up 14.5% over the past 90 days and 17.3% over the past month, predictably creating problems for some exchange traded funds tracking rate-sensitive asset classes and sectors.
Just a few months after wrapping up 2014 with a nearly 29% gain, good enough to make it the best of the nine sector SPDR exchange traded funds, the Utilities Select Sector SPDR (NYSEArca: XLU) is sporting a 7.4% year-to-date loss, making it the worst of the nine sector SPDRs. That means it is time to take a careful look at the technical condition of XLU, the largest utilities ETF by assets. [Rate-Sensitive ETFs get Jammed Up]
“For many years investors have viewed Utilities as sensitive to interest rates. Is this still true? Whether they are sensitive to rates are not, an important test of channel support is very near,” according to Chris Kimble of Kimble Charting Solutions.
XLU recently fell below its 200-day moving average and is more than 1% below its 20- and 50-day lines.
At the fundamental level, XLU entices with a 3.44% trailing 12-month yield, but that income does not come cheap as the utilities sector is often richly valued. The sector trades “for an average 16.4 times estimated 2015 earnings. However, the sector is at a 5% discount to the Standard & Poor’s 500 price/earnings ratio based on projected 2015 earnings,” according to Barron’s. [Considering Utilities ETFs Again]
Several of the ETF’s largest holdings yield more than 4%. That is the case for Southern Co. (NYSE: SO), Consolidated Edison (NYSE: ED) and Duke Energy (NYSE: DUK). That trio combines for nearly 20% of XLU’s weight.
Getting back to the charts, XLU could be in a precarious spot.
“Over the past few years, XLU has done well, inside of a rising channel? Is XLU forming a Head & Shoulders topping formation again? It would appear its a little soon to tell on the pattern. For sure XLU is nearing the bottom of its multi-year rising channel. A break of support could bring in some sellers of the ETF,” said Kimble.
Some investors are not waiting around to see what happens next. XLU has lost almost $387 million since the start of the current quarter while the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) has lost $580.5 million, indicating some investors are convinced rising rates are imminent.
Utilities Select Sector SPDR
Chart Courtesy: Kimble Charting Solutions
Tom Lydon’s clients own shares of TLT.