It goes a little something like this for utilities stocks and exchange traded funds: Treasury yields rise and the utilities sector falls.
Ten-year Treasury yields are up 6.8% over the past month while the Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities ETF, has tumbled nearly 3%. Over the past 90 days, ten-year yields have jumped 14.2% while XLU is off 2.1%. Those recent declines have XLU at a critical technical juncture. [Crunch Time for Rate-Sensitive ETFs]
“When looking back over the past 20 weeks, the Dow Jones Utilities index is down over 13%. This represents the worst 20 week performance since 2009. This decline has taken utilities down to a support line that dates back to the 2009 lows,” according to Chris Kimble of Kimble Charting Solutions.
Interestingly, while XLU has absorbed its worst 20-week performance since 2009, the rate-sensitive iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) experienced one of the worst 16-week rate of change declines in its 13-year history. Long-term bonds are most at risk of a rate hike. For instance, TLT shows a 17.7 year duration – duration is a bond fund’s measure of interest rate sensitivity. Consequently, a 1% rise in rates could translate to about a 17.7% decline in TLT’s price. In contrast, bond funds with shorter durations would have a lower sensitivity to rate changes. [Bearish Bond ETFs Back in Style]
“As you know, Utilities are usually concerned about the direction of interest rates. I suspect that the sharp rise in rates over the past few months have had much to do with the weakness in bond prices,” adds Kimble.
Investors are clearly heeding the warnings from the Treasury market when it comes to utilities ETFs. Year-to-date, $636.2 million has been pulled from XLU. Investors have also yanked $1.1 billion from the iShares U.S. Utilities ETF (NYSEArca: IDU) and $155.1 million from the Vanguard Utilities ETF (NYSEArca: VPU).
Still, some investors see opportunity with rate-sensitive assets such as XLU and real estate ETFs, noting that 10-year yields are overbought and sentiment against the likes of XLU is at bearish extremes, which could create opportunity from the long side with the utilities sector. [Rethinking Rate Sensitive ETFs]
Utilities Select Sector SPDR
Chart Courtesy: Kimble Charting Solutions