Conservative utilities stocks and sector-related exchange traded funds have been the best performing area of the market this year. However, the outperformance has made this defensive segment rather pricey.
Year-to-date, the Utilities Select Sector SPDR (NYSEArca: XLU) increased 23.3% while the SPDR S&P 500 ETF (NYSEArca: SPY) gained 5.4%.
However, the impressive rally this year has left the sector overextended, with elevated valuations, causing some analysts to warn of a possible bubble, MarketWatch reports.
XLU currently shows a 18.69 price-to-earnings and a 1.87 price-to-book. The S&P 500 Utilities Sector is showing a 12-month forward price-to-earnings ratio of 19, compared to its 10-year average of 14 and will above the PE of 16.4 for the broader index.
The utilities sector is trading at heightened valuations after investors plunged into the defensive play in search of yield and safety in an environment of historically low yields, slow growth and geopolitical uncertainty.
Related: Will the Utilities ETF Sector Keep Shining?
“It’s a simple macro trade, when rates are falling and there is global uncertainty investors buy defensive and domestic sectors like utilities,” Diane Jaffee, senior portfolio manager at TCW, told MarketWatch.
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