Interest Rates Dim Utility Sector ETFs

ETF Trends

Investors are shifting out of low-risk, defensive sectors as the stock market has shown signs of life. Focused exchange traded funds such as the Utilities Select Sector SPDR (XLU) , which has lost 3.7% over the past week, have experienced outflows as investors lose interest.

“While the S&P 500 Index  rose 0.6% on Tuesday, the utilities sector closed down 1.2%, the second-worst performer on the day. As for May, utilities are down 7.8%, compared with 3.9% advance in the S&P 500,” Wallace Wikowski wrote for MarketWatch. [Utilities ETFs Showing Signs of Wear]

The classic characteristics of the utilities sector such as steady dividends, low-volatility and performance in down markets has worked against this area of the market lately. Investors are turning to riskier stocks and assets classes now, despite the recent rise in interest rates. Daniel Putnam for InvestorPlace reports that the 24% run-up in the utilities sector from November of 2012 through April 2013 has distorted valuations and is currently delivering negative earnings per share growth this year. [Utilities ETF Down 9% in May as Interest Rates Rise]

For 2013, the utility sector rallied 17% through April, compared to the S&P 500 up 12% for the same time frame. Currently, the S&P 500 has gained 16.4%, while the utility sector is up 9.2% year-to-date.

The recent utility sector sell-off has been joined by outflows from low-volatility ETFs. The PowerShares S&P 500 Low-Volatility Portfolio (SPLV) has experienced $227 million in outflows for the week, and about $391 million for the month, according to XTF data. Brendan Conway for Barron’s reports that SPLV still has positive net flows for 2013, at $1.3 billion. [Have Low-Volatility ETFs Overstayed Their Welcome?]

Market analysts believe conventional wisdom regarding the Federal Reserve and future rate rises could be contributing to this change of heart, but it is not the full story. The recent uptick in the 10-year Treasury note of one half a point in May has been the highest yield seen in over one year. [Low-Volatility ETF Cools as 'Junk' Stocks Soar]

“While defensive stocks outperformed cyclical stocks for much of early 2013 and the yield on the 10-year bond spent very little time north of 2%, utilities had become a favorite of yield seekers, who looked to the sector for their traditionally high dividends,” Witkowski wrote.

Utilities Select Sector SPDR

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XLU, SPLV, Utilities, Sector ETFs

Utilities ETFs

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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