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July Split Decision Looms for Utilities ETFs


The second quarter is history and it is safe to say one of the more prominent themes investors heard about in the April-June time frame was rising interest rates. That is rising rates and which sectors are most vulnerable to those higher rates.

Utilities ETFs were the hardest hit sector play over the second quarter on rising interest rates and Federal Reserve tapering speculation. The Utilities Select Sector SPDR (XLU) , the largest utilities ETF by assets, sank 3.5% in the second quarter while the iShares U.S. Utilities ETF (IDU) dropped almost 2.4%. [Rising Rates Hit Utilities ETFs in Q2]

In what may be a sign of things to come, IDU fell 1.3% on Monday on volume of more than 6.2 million shares. The ETF’s average daily turnover for the previous three months is about 121,600 shares. IDU’s decline came as yields on 10-year U.S. Treasurys rose about half a percent to 2.48%, still off the highs seen last month.

After the slack second-quarter performance, the outlook for utilities in July is muddled and seasonal trends point to the possibility of a split decision. For example, The Stock Trader’s Almanac notes that establishing a long position in utilities at the end of July with the intent of selling in early January is a trade that was worked well over time. [Q2 ETF Performance Report]

Waiting until the end of July to go long utilities ETFs might be advisable because the other side of the argument is historical weakness displayed by XLU in the seventh month of the year. All nine of the select sector SPDR ETFs issued by State Street’s (STT) State Street Global Advisors unit, the second-largest U.S. ETF sponsor, have trading data dating back to December 1998.

That means this July is the 15 th July in which XLU will trade. Over the previous 14 Julys, XLU has been the worst performer of the nine select sector SPDRs, according to CXO Advisory Group. However, the CXO data support The Stock Trader’s Almanac claim that waiting until the end of July to buy utilities could be a winning trade. Over the previous 14 Augusts, XLU is the second-best SPDR ETF behind the Consumer Staples SPDR (XLP) . In the past 14 Septembers, XLU is the best SPDR.

So which SPDR has been the best in the month of the July? The CXO data indicate the answer to that question is the Materials Select Sector SPDR (XLB).

Utilities Select Sector SPDR

ETF Trends editorial team contributed to this post.

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.