Rare is the opportunity for investors to step into utilities sector with favorable valuations. The sector usually trades at a premium to the broader market. That is the cost of grabbing the group’s above-average dividend yield and often below-average volatility.
But after being beaten up rising Treasury yields, utilities stocks and exchange traded funds could be giving income investors favorable entry points with the benefit of compelling valuations.
“Utilities stocks fell 11% in the first six months of this year, which made them the worst-performing sector in the Standard & Poor’s 500 index by a wide margin. They are lagging behind even beaten-down energy stocks. Their crime: Being sensitive to changes in interest rates, when Treasury yields have risen, and the Federal Reserve has made no secret of its desire to start raising the federal-funds rate later this year,” reports Ben Levisohn for Barron’s.
Entering Monday, the Utilities Select Sector SPDR (NYSEArca: XLU), Vanguard Utilities ETF (NYSEArca: VPU) and the iShares U.S. Utilities ETF (NYSEArca: IDU) were each down about 9% year-to-date and investors had made clear they were not sticking around for further declines. As of July 2, XLU had bled $921.6 million in assets this year while investors yanked over $1.2 billion from IDU. VPU is lighter by $158 million. [Trouble for Utilities ETFs]
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]