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.
Related: Surging Utilities ETFs
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.
“The high cash flow nature of utilities has historically warranted a below-market price-to-earnings (P/E) ratio due to their traditional lack of growth. Recent strong performance by the utility sector has pushed its valuation level to nearly on par with that of the S&P 500. As of May 27, 2016, the Utilities Select Sector ETF’s P/E ratio of 17 was nearly even with the S&P 500’s ratio of 18 and far above the P/E ratio of 12 the fund had in 2011,” adds Investopedia.
Utilities Select Sector SPDR
