Traders Turn The Lights Down On Utilities ETFs

Utilities SPDR (ETF) XLU and rival utilities exchange-traded funds are surging.

XLU, the largest utilities ETF by assets, is higher by 6.6 percent and resides about half a percent below its 52-week high. The rival Vanguard Utilities ETF VPU is higher by 6.2 percent and is just 0.2 percent off its 52-week high.

Utilities ETFs

By virtue of its bond-like characteristics but hearty yield, XLU is a favorite among defensive-minded, yield-starved income investors. Unfortunately, persistently high valuations are a concern for the utilities sector, potentially making the sector even more unattractive as investors price in multiple interest rate hikes from the Federal Reserve this year.

Data suggest some traders are preparing for utilities stocks and ETFs to retreat in the near term.

Related Link: A Neutral View On A Big Utilities ETF

“XLU has roughly doubled the performance of the broad based S&P 500 in the trailing one month period, but going back six months trailing, it has under-performed considerably. While XLU is trading at its highest level in months this morning, it seems that some may be looking for a potential pullback in the sector over the next several weeks given some trading that we have seen in the March 49 puts, which expire on 3/17/17,” said Street One Financial Vice President Paul Weisbruch in a note out Tuesday.

A common criticism of the utilities sector is that it forces investors to pay up on valuation to garner the benefits of high dividend yields and defensive traits. However, that is not necessarily the case at the moment as AltaVista estimates a 2017 price-to-earnings ratio of 17.1 for XLU, the same estimate the research firm has on the S&P 500.

ETF Movements

Year-to-date, investors have pulled money from VPU and XLU.

“XLU has seen some position trimming year-to-date, with about $565 million leaving the fund via redemption flows, yet the fund is still the largest utilities fund in the U.S. listed landscape by a wide margin, ahead of VPU which has also seen some profit taking year-to-date, with approximately $112 million vacating the fund,” said Weisbruch.

Investors looking for a bearish ETF on the utilities sector can consider the Direxion Daily Utilities Bear 1x Shares UTLZ, which debuted last month.

UTLZ aims to deliver the daily inverse performance of the Utilities Select Sector Index, the same index tracked by XLU. UTLZ is an inverse ETF, but it is not leveraged.