As is the case with consumer staples counterparts, utilities exchange traded funds, such as the Utilities Select Sector SPDR (NYSEArca: XLU), roared higher in the first half of this year as investors favored defensive, low beta, income-generating segments of the equity market.
In fact, XLU spent significant time earlier this year as the best-performing sector SPDR ETFs. However, the largest utilities ETF is lower by nearly 3% over the past month amid a confluence of concerns, namely that the Federal Reserve will soon raise interest rates and that defensive sectors, including utilities, are overvalued.
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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.
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.
[related_stories]However, just like staples, some market observers believe the utilities sector is now oversold.