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?
Still, it cannot be ignored that XLU, the largest utilities ETF, is up 3.4% over the past week and nearly 5% over the past month.
The bond-esque utilities sector has also weakened alongside the fixed-income market as Treasury yields rose on the Fed outlook and inflationary pressures. 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.
In January 2016, “the S&P 500 Index lost 4.8% over the same time period, and was down over 11% at its lowest point that month. Utilities and Consumer Staples are generally considered defensive shelters for when the market goes sour, and they held up that role during last year’s selloff,” reports ETF Daily News.
For more information on defensive ETFs, visit our defensive ETF category.