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]
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]
XLU’s “weekly momentum reading is projected to rise to 69.53 this week, up from 58.19 on Jan. 29. Momentum scales from 00.00 to 100.00 with a reading below 20.00 oversold and a reading above 80.00 overbought. A rising reading above 20.0 is positive while a declining reading below 80.00 is negative,” according to TheStreet.com.
Utilities Select Sector SPDR
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.