For over three years, the utilities sector has been a
leadership group, cementing the notion that investors have been
somewhat apprehensive about the broader market rally.
As investors have searched for yield while pouring billions of
low volatility broad market and sector fund
, utilities stocks and
By the standards of a supposedly slow-moving sector
historically low correlations to the S&P 500, the
year-to-date gains accrued by the major utilities are
jaw-dropping. The Utilities Select Sector SPDR (NYSE:
), the Vanguard Utilities ETF (NYSE:
) and the iShares Dow Jones US Utilities Index Fund (NYSE:
) are all up more than 18 percent this year. The SPDR S&P 500
) is up nearly 14 percent.
Maybe a true risk on rally is forming, but utilities ETFs have
been far outpacing riskier fare this year. For example, all of
the aforementioned utilities funds have outpaced the tech-heavy
PowerShares QQQ (NASDAQ:
) by more than 700 basis points year-to-date.
However, there are signs some of the air is starting to come
out of the utilities trade. XLU, the largest utilities ETF by
assets, is down 1.2 percent Monday while the S&P 500 is
modestly higher. That extends XLU's five-day loss to over two
percent. The Vanguard Utilities ETF, the cheapest utilities fund
with an expense ratio of 0.14 percent, is also lower by more than
one percent Monday and has lost 1.8 percent in the past five
Part of the problem could be sector rotation as investors that
are looking to be long stocks go shopping for what they perceive
to bargains or good deals. On a valuation basis, the utilities
sector does not offer "good value." Nearly a year ago, Benzinga
noted XLU was sporting a P/E ratio of 15.4
That is toward the higher end of historical norms for the
sector. From June 19, 2012 through the end of July, XLU would
gain about $1.20 before wilting through much of the third
quarter. XLU and friends would later be
hammered by fiscal cliff fears
At least that was the easy excuse to use and it was convenient
because it ignored the frothy valuations seen in the utilities
space. These days, XLU sports a P/E of 16.77 and a price-to-book
ratio of 1.72,
according to State Street data
. In other words, XLU is more expensive today than it was 11
The iShares Dow Jones U.S. Utilities Sector Index Fund is no
bargain, either. That ETF has a P/E of nearly 22 and a
price-to-book ratio of 1.86,
according to iShares data
Still think utilities are not pricey? Well, Google (NASDAQ:
) trades at 16 times forward earnings. The Technology Select
Sector SPDR (NYSE:
) allocates a combined 21 percent of its weight to Apple (NASDAQ:
) and Google has a lower P/E than XLU.
The aforementioned utilities can stay expensive for extended
time periods. These funds have already proven as much, but the
recent declines combined with the Nasdaq showing signs of life
could be an indication investors are willing to be more
aggressive and less exposed to utilities stocks.
Even if valuation is not the primary problem with these ETFs,
there are technical issues, too. All three have fallen below
their 20-day moving averages. Exelon (NYSE:
), a top-10 holding in all three ETFs, cut its dividend earlier
this year. Last month, Teco Energy (NYSE:
) announced a dividend reduction. Small-cap utility Atlantic
) is another member of the utility dividend cut club in 2013.
All of that is not to say other XLU constituents will be
reducing dividends, but it is also fair to say utilities ETFs are
too pricey to have deal with the specter of lower payouts.
Particularly when XLK and QQQ trade at lower valuations and offer
ample exposure to cash-rich companies that have helped propel
technology to the fastest-growing dividend sector in the U.S.
For more on ETFs, click
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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