The Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities sector exchange traded fund, is up about 8.1% year-to-date. That performance is solid when considering investors have preferred growth and momentum stocks and when noting the Federal Reserve has increased interest rates twice in 2017.
As is widely known, the Federal Reserve holds its July meeting this week. Fed meetings can potentially put focus on rate-sensitive asset classes and sectors, including utilities. 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.
“According to data from Schaeffer’s Senior Quantitative Analyst Rocky White, the top four stocks to own during Fed weeks (sorted by percent positive and average return) are out of the utilities sector.,” according to Schaeffer’s Investment Research. “PPL Corp. (NYSE: PPL) stock leads the pack, boasting the best win rate of all S&P 500 Index (SPX) stocks, ending Fed weeks on the plus side 85% of the time going back to 2015. Further PPL has averaged a weekly return of 1.93%. Scana (NYSE: SCG) has fared similarly well, boasting a healthy average Fed-week return of 1.98%, and ending the week higher 80% of the time.”
No sector is as negatively correlated to rising interest rates as utilities, meaning the longer the Fed resists raising interest rates, the longer high-yielding utilities stocks and ETFs remain compelling destinations for yield-starved investors.
“If the central bank takes a hawkish tone with its forecast, it could potentially undermine the typically bullish momentum for utilities stocks in the Fed-meeting aftermath. That’s because higher rates will increase the companies’ borrowing costs, and also reduce the appeal of the traditionally attractive dividend yields in the utilities sector,” reports Schaeffer’s.
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