The utilities sector is the best-performing group in the S&P 500 this year, but with the Utilities Select Sector SPDR (NYSEArca: XLU) up 18% year-to-date, plenty of market observers are willing to sound off on downside for utilities stocks and exchange traded funds.
However, the logic that supposedly boring utilities stocks and ETFs have rallied too far too fast may not jibe with the reality of the current market environment. 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 year and the most recent batch of U.S. employment data could put make it hard for the central bank to boost rates this monnt or next month. Add all that up and it is easy to see why investors have flocked to XLU and rival utilities ETFs this year.
Related: Surging Utilities ETFs
On Thursday, about 30 ETFs hit all-time highs. Underscoring the strength of the utilities group, seven of those ETFs were dedicated utilities while several more were dividend or low volatility ETFs with large weights to utilities stocks.
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. However, that dependability is not keeping critics at bay.
[related_stories]“The Dow Jones Utility Average is pushing higher into my target “SELL” zone with a monthly bearish divergence. In my opinion, this is a big deal and begs of caution… in the past 26,854 days Utilities have never gone longer without a “major” correction,” according to See It Market.
Even frothy valuations on utilities are not deterring investors.
Goldman Sachs notes “that regulated utilities now trade at a forward price-to-earnings ratio in excess of the S&P 500 based on estimated 2017 and 2018 earnings. That ratio is also elevated relative to the sector’s five-year average,” reports Bloomberg.
Related: Best of Both Worlds With This Dividend ETF
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.
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Utilities Select Sector SPDR
