Utility stocks have been gaining traction in a near-zero interest rate environment as investors flocked to higher yielding assets. For instance, VPU has a 3.54% 12-month yield, IDU has a 3.43% 12-month yield and FUTY has a 4.17% 12-month yield, whereas the yield on benchmark 10-year Treasuries is 2.33%. However, the utilities sector was hardest hit area Friday as a rate hike would make these riskier bond proxies less attractive.
“Longer-term, in a rising-rate environment, investors should expect flat returns at best for utilities companies and underperformance when compared with other equity sectors,” according to Morningstar analyst Robert Goldsborough. “Higher rates generally make fixed-income instruments more attractive on a relative basis and make bondlike equities, such as utilities companies, less attractive.”
Vanguard Utilities ETF
For more information on the utilities sector, visit our utilities category.
Max Chen contributed to this article.