With the Federal Reserve yet to raise interest rates and it appearing as though it will be one rate hike at the most before 2017 rolls around coupled with investors’ desire for higher-yielding assets, it is not surprising that the Utilities Select Sector SPDR (NYSEArca: XLU) is the best performer among the sector SPDR exchange traded funds.
While impressive upside moves by XLU and friends have drawn plenty of cheers, there is no dearth of criticism and concern about soaring utilities ETFs. However, despite the best efforts of some market observers to talk investors out of stakes in the utilities sector, the group looks primed for additional upside.
Related: Utilities ETFs Keep Rising
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.
The Fed, though, may push off on an interest rate hike to July, especially after the unexpectedly weak jobs data. Nevertheless, investors should begin to consider the end game and the potential negative effects a rising rate environment can have on rate-sensitive equities like utilities.
“One example of the sector’s conformity dealt with its breakout, and subsequent tests, that we noted back in early April. The near textbook breakout launched the utility stocks on yet another rally leg that would cement the sector as the star of the first half of the year. It would be a very different story as the second half began, however, as the utility sector immediately topped out. Again, though, the charts gave us an accurate head’s up of a potential stalling out by the sector,” according to See It Market.
[related_stories]Looking ahead, FactSet projects the utilities sector is expected to experience earnings growth of 4.4% in 2016. Consequently, analysts warned that the lofty prices may not be supported by robust earnings growth.
The trailing 12-month PE ratio for utilities of 19.85 is now higher than that of the more volatile technology sector at 19.16.
Related: Safe-Haven ETFs for a Rocky Summer
If the Dow Jones Utilities Average “holds above 670-ish, the road should lead higher. Although, a detour toward the low-650′s level that marked the breakout of the January 2015 highs would not be a shock. On the upside, the index may run into roadblocks in the low-700′s and at the highs around 724. And if the index is going to break out of this recent range, in either direction, it will likely take, as the sign in the photo says, some serious work ahead by the utilities,” according to See It Market.
For more information on Utility ETFss, visit our Utility ETFs category.
Utilities Select Sector SPDR
