Utilities, which offer sizable dividend payouts in exchange for relatively low growth prospects, have been a natural choice over the past several years amid record low interest rates. But now bonds are selling off hard and pushing interest rates to their highest levels in several months.
The natural fear is that higher rates will lead to lower prices for utility names, as investors no longer need to reach for yield.
Analyst David Fabian pointed out Utilities’ ongoing sell-off last month, noting a “poor risk-to-reward setup in interest rate sensitive asset classes.” That trend is clearly taking hold now in a big way, with REIT funds also selling off considerably this morning.
Utilities, along with other high-yielding sectors, could see considerably more downside through the end of the year if rates continue to grow higher, so this situation is worth monitoring closely for investors with exposure to the sector.
The Utilities SPDR ETF (NYSE:XLU) fell $1.68 (-3.42%) to $47.49 per share in Wednesday morning trading. Year-to-date, the largest fund tied to utility stocks has still gained 9.7%, but is now down more than 10% from its yearly highs.