The fortunes of the utilities sector seem to be tied to the Federal Reserve’s interest rate outlook. Once the Fed eventually hikes interest rates, the higher rates will make fixed-income instruments more attractive on a relative basis, and bond-like equities, like utilities, less enticing. Consequently, utilities may remain flat or underperform other segments of the equities market once rates start ticking higher.
Given the utilities’ dividend association, the sector is also found in many dividend-focused ETF strategies. For instance, the iShares Select Dividend ETF (NYSEArca: DVY) is the second largest dividend-related ETF on the market, with $15.2 billion in assets under management, and the ETF includes a hefty 31.7% tilt toward utilities.
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DVY could see further upside because the Fed may not be able to raise interest rates as much as previously planned this year, which would keep pressure off utilities and consumer staples names.
Tom Lydon’s clients own shares of DVY.