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.
XLU is usually the second-best of the nine sector SPDRs in August before it turns into the best, on a historical basis, in September. Treasury yields are declining and investors appear comfortable with the notion that there are at least several months ahead before the Federal Reserve raises interest rates, if at all, but with one of the most widely anticipated Fed meetings in recent memory starting today, investors should keep close watch on XLU, Vanguard Utilities ETF (NYSEArca: VPU) and the Shares U.S. Utilities ETF (NYSEArca: IDU). [Yield-Generating ETFs To Play If The Fed Stands Pat]
“Ever since 2008’s financial crisis, utility valuations have been influenced by the artificially low interest rate environment the Fed created. Since the returns available from bonds have been so terrible, investors have naturally moved to utility stocks as a way to increase their income. As the Fed discusses the possibility of higher rates, investors should think about the implications for their utility holdings,” according to a Seeking Alpha post.
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]
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.