The Utilities Select Sector SPDR (NYSEArca: XLU) is down 7.4% year-to-date, a loss largely attributable to rising Treasury and increasing expectations that the Federal Reserve will finally raise interest rates.
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]
Treasury yields rise and the utilities sector falls. With market participants pricing in an interest rate hike from the Federal Reserve, perhaps as soon as this month, the rising yields/slumping utilities sector scenario is playing out. [Crunch Time for Rate-Sensitive ETFs]
Barclays analysts believe utilities stocks have upside potential, even if the Fed proceeds with boosting rates this month and several times next year.
“The cycle, they say, most closely resembles that of 2004, and regulated utilities outperformed the broader market by 6% and 18% in the three and 12 months following the first hike that year,” according to Seeking Alpha. “As for this particular moment, Barclays says a flattening yield curve, increasing high-yield default rates, and a strong greenback impacting S&P earnings relative to utilities all bode well for the sector.”
Looking at the utilities profit outlook, Capital IQ estimates that the sector could post earnings growth of 0.9% for the third quarter and 1.7% for all of 2015.
In contrast, the S&P 500 is expected to see earnings decline of 4.5% for Q3, which was downwardly revised since the start of the third quarter, according to FactSet data, as energy and multinational sectors weighed on the broader index. Those data points underscore the predictable though often slow-growth profit outlooks seen in the utilities sector.
“The average utility dividend yield has risen to 4.02 percent from 3.96 percent on Sept. 16, another sign that investors expect a rate increase. It had dropped to 3.68 percent on Oct. 22 after the Fed left its target rate at zero percent to 0.25 percent,” according to Bloomberg.
Utilities Select Sector SPDR
