Utilities ETFs Cool Off in a big Way

The Utilities Select Sector SPDR (NYSEArca: XLU) has spent significant time as one of this year’s best-performing sector exchange traded funds. Until recently, XLU was actually the best performer among the sector SPDR ETFs, but has since been usurped by the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund.

In just the past week, XLU has tumbled nearly 4% and some traders believe there could be more downside to come for once hot utilities stocks and ETFs.

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.

Related: Will the Utilities ETF Sector Keep Shining?

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.