Even with last Friday’s rally, the Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities sector exchange traded fund, remains is lower nearly 8% year-to-date and labors more than 15% below its 52-week high.
As the Fed continues raising 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. Still, some market observers see the recent slide in utilities stocks as a potential buying opportunity.
“On a median basis, U.S. utilities now trade in line with our fair value estimates, the cheapest they’ve been since 2015,” said Morningstar in a recent note. “This is a sharp reversal since Nov. 14, when utilities reached a peak 1.18 price/fair value ratio. Since then, the Morningstar US Utilities Index is down 14% and has underperformed the S&P 500 by 19 percentage points. No other sector has performed as poorly.”
XLU and rival utilities continue to captivate yield-starved investors as the sector sports more tempting yields than are found on U.S. government debt.