Being Cautious With High-Yield Sectors | ETF Trends

With Treasury yields tumbling and the Federal Reserve poised to continue lowering interest rates, investors are flocking to high-yield sectors and the related ETFs are surging. For example, the Utilities Select Sector SPDR (NYSEArca: XLU) and the Real Estate Select Sector SPDR Fund (NYSEArca: XLRE) are up an average of 24% year-to-date.

XLRE’s dividend yield of 3.19% is more than double that of 10-year Treasuries while XLU, the largest utilities ETF, yields nearly 3%.

Utilities are typically more stable stocks since the demand for their services, notably electricity and gas, is steady from both consumers and businesses. Moreover, in a lower-for-longer yield environment, utilities come with more attractive above-average dividends.

“Speaking of debt, most sectors are yielding higher than 10-year Treasuries. This is juxtaposed with yields of rate-sensitive sectors, such as Utilities and Real Estate, which are near their bottom decile of the past 15 years,” said State Street in a recent note.

Enjoy A Cautious Tone

Real estate investors enjoy attractive dividend yield-generation, which provides an alternative to bonds as a source of income. The sector offers yields that exceed sovereign and corporate investment bonds. Unlike bond coupons, real estate dividends can grow over time, which is invaluable in periods of high growth and inflationary environments. Additionally, due to real estate’s long-term leases, they provide a more reliable source of dividends than other equities.

“All of this points to stocks yielding more than bonds, as interest rates have moved so low on traditional treasuries,” notes State Street. “Assessing Utilities and Real Estate, we also see that, because price performance has been so strong recently for investors searching for any yield greater than 2.5%, the current yields sit in the bottom 10th percentile that it has been in the past 15 years.”

Related: Depressed Bond Yields Help These Sector ETFs Shine 

Bottom line: investors embracing the likes of XLU and XLRE need to hope Treasury yields don’t suddenly spike higher.

“Investors are searching for yield, and that has been driving some of the price-performance in very specific sectors. With that as the case, if the rate environment changes the price performance on some of these sectors could be impacted,” according to State Street.

For more information on the market sectors, visit our sector ETFs category.