The Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities exchange traded fund, is the top asset gatherer among the nine sector SPDR ETFs to start this year and it is easy to understand why. Two of the utilities most popular traits – income via dividends and low volatility – are being prized by investors again this year.
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.
“Utilities are in the midst of earnings season. Helping the sector was a better-than-expected report from NextEra on Jan. 28. Southern reports before the opening bell on Wednesday, and analysts expect the company to earn 42 cents a share. Duke Energy is not scheduled to report until Feb. 18, and analysts expect the company to earn 95 cents a share,” according to TheStreet.com.
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]