Finding Safety With Utilities ETFs

The Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities exchange traded fund, has not been a star performer to start 2016, but it has been a steadier play than many other sector ETFs. That much is confirmed by XLU’s gain of 1.2% since the start of the year, a showing that easily outpaces an array of other industry sector funds and one that proves utilities are a favored destination in rocky market environments.

Utilities sector fundamentals remain strong. However, utilities have been underforming due to the sector’s inverse relationship to rising interest rates – when rates rise or investors fear higher rates, utilities typically underpeform, and vice versa.

Most investors view utilities as a reliable, income-generating asset that exhibit some bondlike characteristics. As interest rates declined, the sector appealed to many income investors for its relatively higher yields.

XLU “is the only major sector ETF that has not fallen back to test its 2015 summer lows. That is a back-handed compliment, however, because it has done nothing but chop around in a sideways range for the past 10 months. Still, when the market moves multiple percentages up and down each day, there is something to be said for sideways,” reports Michael Kahn for a Barron’s.

For more alternative indexing methodologies, the First Trust Utilities AlphaDEX Fund (NYSEArca: FXU) selects components based on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets.