Utilities Slump in Q3, but Energy Continues to Show Strength | ETF Trends

Amid a volatile stock market, utilities were one of the go-to-market sectors that could provide some stability, but they’ve been slumping at the tail end of the third quarter. However, a similar play in the energy sector is continuing to bear fruit for traders.

Looking specifically at leveraged exchange-traded funds (ETFs), the Direxion Daily Utilities Bull 3X Shares (UTSL) was up over 30% through the first week of September before experiencing a precipitous drop heading into the end of Q3. That was reflected in broader weakness in the utilities sector that hasn’t been piggybacking off the strength of energy as inflation continues to rack the capital markets.

“Utilities provided a safe haven earlier in 2022, but their outperformance has faded, even as investors remain defensive,” an S&P Global article noted, citing weakness in gas utility stocks in particular.

The sector followed the broader stock market in the third quarter as investors continued to fret over rising interest rates. The U.S. Federal Reserve’s tightening is applying obvious pressure on the stock market, but also the bond market as well.

“The bond vigilantes have finally returned, forcing global central banks to tighten the monetary screws in order to contain inflation, which is proving to be stubborn and spreading like wildfire,” said Nasdaq IR Intelligence senior analyst Massud Ghaussy. “As a result, we are witnessing one of the fastest tightening cycles in modern history, the third great bond bear market of the century, and a market of twin losses [for stocks and bonds] since the beginning of the year where there are very few places to hide safely.”

UTSL Chart

UTSL data by YCharts

Energy Continues Its Strength

As the cost of energy like gas continues to climb, it’s translating into continued strength for the energy sector. It’s been one of the few bright spots in the stock market heading toward the end of 2022.

The S&P 500 Energy index is up about 35% for the year, while the  Direxion Daily Energy Bull 2X Shares (ERX) is up almost 100% for the year with its triple leverage. ERX seeks daily investment results equal to 200% of the daily performance of the Energy Select Sector Index—the index is provided by S&P Dow Jones Indices and includes domestic companies from the energy sector, which consists of the following industries: oil, gas, and consumable fuels, and energy equipment and services.

While UTSL faltered near the end of the third quarter, ERX sprang higher. Within a three-month time frame, ERX is up 29%, while UTSL is down 27%.

ERX Chart

ERX data by YCharts

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