Investors that are experienced with the utilities sector and the related exchange traded funds, namely the Utilities Select Sector SPDR (NYSEArca: XLU), know at least two things about this group.
First, utilities stocks and ETFs are prized for being low beta, defensive, high-yielding income plays that are viewed as similar to bonds. Second, the trade-off when accessing those favorable traits is that the utilities sector is inversely correlated to rising interest rates. That is information worth remembering with another Federal Reserve meeting right around the corner.
However, there is some surprising data that indicates stocks and the utilities sector in particular, can perform admirably around Fed meetings.
“Going back to 2015, the SPX has averaged a 0.10% gain during Fed meeting weeks, according to data from Schaeffer’s Senior Quantitative Analyst Rocky White. Further, the S&P has ended Fed weeks higher 53% of the time. That’s just slightly beneath the index’s anytime weekly stats since 2015, with the SPX averaging a gain of 0.13%, with a positive rate of 55%,” according to Schaeffer’s Investment Research.
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.
“As to the best ETFs to own during the week of a Fed meeting, it’s no surprise to find the Utilities Select Sector SPDR Fund (XLU) near the top of the list. Shares of XLU have ended the week higher 68% of the time, going back to 2015, with an average weekly return of 0.89%. However, metal-based ETFs tend to perform even better, likely because tangible assets are often seen as “safe haven” investments and inflationary hedges,” according to Schaeffer’s.
XLU, the largest utilities ETF by assets, is higher by 10.6% year-to-date.
For more information on defensive ETFs, visit our defensive ETF category.