The flip side of course is that XLU is now far more attractive for those with a relative value mindset who may opt to consider their stable dividend streams and historically lower volatility. This ETF now sports a dividend yield of 3.53%, which is more than double that of the SPDR S&P 500 ETF (SPY).
Another sector feeling the sting of interest rate activity is the Real Estate Select Sector SPDR Fund (XLRE). This ETF and many of its peers such as the Vanguard REIT ETF (VNQ) have seen prices fall 6-8% over the last two months and are currently trading below the flat line for the year.
Real estate stocks haven’t experienced quite the same measurable price decline as utilities, but still sport obvious sensitivity to higher financing rates. Some of the larger companies that make up this group include Public Storage (PSA) and AvalonBay Communities (AVB).
Many income investors love the attractive yields that these sectors provide in comparison to other growth-focused industries. Yet that same dynamic is also why these stocks can diverge from the momentum of the broader market. They can often assume characteristics of bonds as risk appetites shift along varying cycles.
The Bottom Line
The short-term underperformance of any sector is a common occurrence that must be evaluated within the context of why you own it or are considering a purchase to begin with. The overriding risk factor in this situation is the continued ascent of interest rates weighing on future gains in both utilities and REITs. Nevertheless, the market is often quick to undergo short bouts of anxiety that are just as soon alleviated as other themes or fears capture investor attention.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
This article was republished with permission from FMD Capital Management.