A Bearish Call on a Big Utilities ETF

Up 13.2% year-to-date the Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities exchange traded fund, is one of this year’s best-performing sector ETFs.

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 bond-like characteristics. As interest rates declined, the sector appealed to many income investors for its relatively higher yields.

Further boosting the allure of utilities stocks and ETFs like XLU is the Federal Reserve’s ongoing reluctance to raise interest rates. The Fed passed on that opportunity earlier this month and though there is chatter that could change next month, current bond market data indicate many bond traders are not betting on an April rate hike.

Add all that up and it is easy to see why investors have flocked to XLU and rival utilities ETFs this year. However, a 13.2% gain in less than four months by XLU is being viewed as too much too fast by some traders and some are even willing to be bearish on the big utilities ETF.