With investors returning to more riskier segments of the market, defensive utility stocks and sector-related exchange traded funds are losing momentum.
The Utilities Select Sector SPDR (NYSEArca: XLU) has declined 3.8% since Wednesday and is now trading below its short-term, 50-day simple moving average.
XLU has increased 9.3% year-to-date and reflects one of the best performing areas of the market as investors turned defensive in light of the spike in volatility at the start of the year. However, the risks are dissipating and the conservative play is losing favor.
ETF investors are already rotating out of the sector. XLU has experienced $300 million in net ouflows over the past week, according to ETF.com.
Utilities may find it harder to keep outpeforming as warm weather hurts earnings, valuations look pricier and Treasury yields inch higher, reports Bob Pisani for CNBC.
Want to read more on Utility ETFs? Visit www.etftrends.com/utilityETFs
“Long viewed as bond substitutes, utilities tend to generate stable cash flows and attractive yields,” writes Morningstar analyst Robert Goldsborough. “There is a long-standing relationship between interest rates and utilities’ performance relative to the rest of the market. When rates rise or investors fear higher rates, utilities tend to underperform. During a low-rate environment or when rates are falling, utilities tend to outperform.”
Utilities have been weakening as Treasury yields rose this month. Benchmark yields on 10-year Treasury have bounced back to 1.89%. Treasuries were on pace for their worst week since November after higher oil prices supported increased bets on rising inflation and strengthened the Federal Reserve’s case to hike interest rates this year.
“Inflation in the U.S. actually is rising and we do think you are going to get towards that target, maybe not this year, but starting into next year,” Jonathan Beinner, global fixed income chief investment officer at Goldman Sachs Asset Management, told Bloomberg.
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