With most traders expecting the Federal Reserve will soon raise interest rates, the central bank’s first rate hike in nine years, rate-sensitive sectors such as utilities are under pressure. For example, the Utilities Select Sector SPDR (NYSEArca: XLU) is lower by about 5% over the past month.
Over the long-term, the utilities sector could continue to generate steady profits as the industry expands operations. According to S&P Capital IQ Equity Analyst Christopher Muir, the utilities industry is experiencing high levels of capital spending on regulated capital spending through infrastructure replacement, new transmission and distribution facilities, and regulated power plants. Additionally, unregulated spending will focus on natural gas-fired combined-cycle power plants and investments in solar and wind.
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]
On the other hand, telecom and utilities stocks are solid ideas when the dollar strengthens because these companies do not generate big chunks of their revenue overseas.
Telecommunication services and utilities have the lowest reliance on global sales. Investors can track the telecom sector through ETFs, including the iShares U.S. Telecommunications ETF (NYSEArca: IYZ), Vanguard Telecommunication Services ETF (NYSEArca: VOX) and Fidelity MSCI Telecommunication Services Index ETF (NYSEArca: FCOM).
For utilities exposure, investors can look to XLU, the Vanguard Utilities ETF (NYSEArca: VPU) and the iShares U.S. Utilities ETF (NYSEArca: IDU).
“Another factor is that utilities companies are generally slow growing, and thus return earnings to shareholders in the form of a dividend to attract investment. This aspect gives utilities stocks, as well as the broader XLU a bond-like asset quality. Therefore, when interest rates rise, share prices of utilities stocks decline,” according to a Seeking Alpha analysis of XLU.
Utilities Select Sector SPDR
