With the Federal Reserve having raised interest rates three times in the past 16 months and with the stage set for rate hikes later this year, the utilities sector is performing surprisingly well. For example, the Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities sector exchange traded fund, is up 6.8% this year.
As 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.
No sector is as negatively correlated to rising interest rates as utilities, meaning the longer the Fed resists raising interest rates, the longer high-yielding utilities stocks and ETFs remain compelling destinations for yield-starved investors.
“Utility stocks have acted much better than expected this year, up 6%, which is slightly better than the S&P 500. In a new research report, Deutsche Bank remains very selective on the industry and carefully raised the price targets on five stocks that are rated Buy,” reports Lee Jackson for 24/7 Wall Street.
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.