Utilities stocks and sector-related exchange traded funds were among the best performers among U.S. equities Friday, likely advancing on retreating Treasury yields.
On Friday, the Utilities Select Sector SPDR (NYSEArca: XLU) rose 2.3%, Vanguard Utilities ETF (NYSEArca: VPU) gained 2.2% and First Trust Utilities AlphaDEX Fund (NYSEArca: FXU) increased 2.3%.
XLU tracks the Utilities Select Sector Index or the utilities segment of the S&P 500 while VPU follows the MSCI US Investable Market Index (IMI)/Utilities 25/50 Index, which also includes smaller U.S. companies in the utilities sector. Both XLU and VPU track market cap-weighted indices.
On the other hand, FXU follows a smart beta indexing methodology that selects components based on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets.
The bond-esque utilities sector has strengthened alongside the fixed-income market as Treasury yields rose after the recent selling may have been overdone. Yields on benchmark 10-year Treasury notes fell to 2.86% Friday after trading around 2.917 Thursday – yields fall as bond prices rise.
Recent interest rate volatility has triggered greater oscillations across asset classes in recent weeks, and the Federal Reserve further fanned the flames after releasing minutes from a January meeting this week.
The lower Treasury yields on Friday also made utilities look more attractive on a yield standpoint. XLU has a 3.43% 12-month yield, VPU comes with a 3.28% 12-month yield and FXU shows a 3.89% 12-month yield.
Nevertheless, the utilities sector remains sensitive to changes in interest rates. 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.
For more information on the utilities sector, visit our utilities category.