XLU yields about 3.3% on a trailing 12-month, making it and rival utilities ETFs popular alternatives to lower-yielding bond funds. The sector, one of the smallest sector allocations in the S&P 500, is also one of the least volatile. However, those favorable traits do not come free. As previously mentioned, utilities are highly sensitive to interest rates. Additionally, the sector often trades at a premium to the broader market due to its high yield and defensive traits.
“XLU’s ability to hang tight is “interesting” given the pressure that has been put on real estate, notes Instinet technical analyst Frank Cappelleri. More importantly, he said that if the S&P 500 hits below 2380 and the XLU breaks out simultaneously could mean that “the environment is indeed changing,’” according to Barron’s.
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.
For more information on defensive ETFs, visit our defensive ETF category.