Due in large part to investors anticipating the Federal Reserve’s first interest rate hike in nearly a decade, the Utilities Select Sector SPDR (NYSEArca: XLU) is down 6.4% this year, making it one of the worst performers among the nine sector SPDR exchange traded funds.
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]
“This attractive financing dynamic has led to a half-dozen substantial acquisition bids during the last year, all at eyewatering valuations. Deals such as Duke Energy’s (DUK) bid for Piedmont Natural Gas (PNY) at 30 times earnings and Southern Company’s (SO) bid for AGL Resources (GAS) at 22 times earnings demonstrate the benefits of low-cost financing to boost long-term earnings growth. We expect more sector consolidation as long as interest rates stay low,” according to a Morningstar note posted by Teresa Rivas of Barron’s.
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.
“Offsetting these tailwinds, we expect weak electricity demand and regulatory risk to remain a concern for some utilities in the U.S. and globally. Diversified utilities and independent power producers with coal and nuclear generation around the globe are struggling as natural gas becomes a cheaper, more environmentally friendly fuel source for power generation,” adds Morningstar.
Utilities Select Sector SPDR
