It is widely known that among sectors, few are as sensitive to changes in interest rates as utilities. In fact, the Utilities Select Sector SPDR (NYSEArca: XLU) is the most negatively correlated to interest rates among the nine sector SPDR exchange traded funds.
In other words it was good news for utilities stocks and ETFs that the Fed passed on raising interest rates following its September meeting. However, small-cap ETFs have struggled in the current quarter as highlighted by an 8% decline for the Russell 2000 Index.
The PowerShares S&P Small Cap Utilities Portfolio (NasdaqGM: PSCU) is an avenue for investors looking for tactical small-cap exposure with the steadiness of the utilities sector. Furthermore, electric prices remain low and stable, which is cutting into profit margins. Lower natural gas prices have kept peak power prices lower, and this trend is expected to last most of the year. [Non-Cyclical Stock ETFs for Conservative Investors]
PSCU is essentially the small-cap equivalent of XLU. The PowerShares ETF follows an index that is “designed to measure the overall performance of common stocks of US utilities and telecommunication services companies. These companies are principally engaged in providing either energy, water or natural gas utilities, as well as services designed to promote or enhance the transmission of voice, data and video over various communications media, including wireline, wireless (terrestrial-based), satellite and cable,” according to PowerShares.
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]
Although utilities stocks and ETFs are vulnerable to the notion of higher interest rates, how the group performs after the Fed actually boosts borrowing cost is another, surprisingly positive matter.