The Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities ETF by assets, and rival utilities ETFs are soaring this year. With expectations in place that the Federal Reserve may not hike interest rates this year, some defensive, rate-sensitive sectors are delivering impressive performances.
The utilities sector was suppose to be a throw away investment as many anticipated a strong economy with a full labor market to push up interest rates, which traditionally weighed on the bond-like utilities stocks.
However, with inflation relatively under control and benchmark Treasury yields still stuck around 3%, utilities remain attractive for yield hunters. Moreover, after the recent bout of volatility, investors are still still looking at the bond-esque sector as a safe way to remain the game and generate some extra dividends on the side.
“Companies with high debt, such as utilities, get hit hard by rising interest rates as the cost of borrowing increases. Slowing global economic growth is expected to keep a hold on the Fed’s rate hike plans this year,” reports CNBC.
High Dividends Back In Style
Last year, some high dividend sectors struggled against the backdrop of rising interest rates until later in the year when stocks swooned, prompting investors to revisit defensive sectors. XLU has a dividend yield of 3.05%, well above the yield of 1.80% on the S&P 500.