Utilities ETFs Could be Headed for Declines if U.S. Interest Rates Rise

XLU and rival utilities ETFs languished on the basis that fixed-income instruments more attractive on a relative basis, and bond-like equities, like utilities, less enticing.

The bond-esque utilities sector has also weakened alongside the fixed-income market as Treasury yields rose on the Fed outlook and inflationary pressures.

Utilities stocks and ETFs are extremely sensitive to changes in interest rates. Still, some investors see opportunity with rate-sensitive assets such as XLU and real estate ETFs, noting that 10-year yields are overbought and sentiment against the likes of XLU is at bearish extremes, which could create opportunity from the long side with the utilities sector.

“Many observers believe the industry has some earnings risk as a result of potential corporate tax reform. The actual impact will depend primarily on the specifics of the reform, with policies regarding interest-expense deductions and 100% depreciation expensing being the critical elements for the industry,” according to the Franklin Templeton note seen on ETF Daily News.

For more information on defensive ETFs, visit our defensive ETF category.