“In fact, the XLU has dropped 9 percent since the beginning of July, to its lowest in just over four months. The fall, according to Phillip Streible, senior market strategist at RJO Futures, can be attributed to what’s going on with the XLU’s two biggest components: electricity and natural gas stocks,” reports CNBC.
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 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: Surging Utilities ETFs
“According to Streible, electricity has recently been hit with more regulatory costs while natural gas rig counts have picked up as of late. Both could end up weighing even more on the utilities sector, especially ahead of a potential Federal Reserve rate hike in December,” reports CNBC.
For more information on defensive ETFs, visit our defensive ETF category.