Even with concerns about higher interest rates, the rate-sensitive utilities sector has been solid this year. For example, the Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities sector exchange traded fund, is up 10.3% year-to-date.
Some market observers believe the sector, prized for its high dividend yield and defensive traits, can keep delivering upside as 2017 moves along.
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.
“On a chart of the utilities-tracking ETF XLU, Evercore ISI Technician Rich Ross points out that the sector has broken out of a “12-month base of support” with XLU forming a “bull flag” over the last few months, a pattern that normally precedes another rally. According to Ross, these short-term technicals are pointing to potentially $60 for utilities, a 12 percent rally from Tuesday’s levels,” reports CNBC.