By Chris Dieterich
The lights are going out for utility stocks.
Utilities played a key role helping drive the market's rally for
much of this year, but have been sinking fast even as the broader
market just below all-time highs.
The Utilities Select Sector ETF (XLU), the largest
exchange-traded fund tied to stocks in the sector, is on pace to
suffer its biggest monthly drop since February 2009, down 7.9% so
far in May. Every other of the eight widely traded sector ETFs
sponsored by State Street Global Advisors has climbed higher this
month.
The Utility ETF bounced back Thursday, up 0.9% to $38.16, after
closing Wednesday at its lowest level since March.
Generally slow-but-steady, utility stocks once held strong
appeal because of their high dividend payouts and sturdy
performance. But rising optimism for the pace of economic growth is
prompting ETF investors to moving into sectors more closely tied to
growth, like technology and industrials.
Others are bailing on utilities with bond yields rising on
speculation the Federal Reserve might pare back its monthly
asset-purchase program. The promise for high payouts from bonds
reduces the need to squeeze income from utility stocks, investors
say.
In May, money has flowed out of so-called defensive sector stock
ETFs at a fast clip. ETFs that track utility stocks have posted
outflows of $267 million, the most since August, according to data
through Tuesday from BlackRock Inc. (BLK). Other defensive sectors
like consumer staples and health-care ETFs also are on track to
suffer their biggest monthly outflows of the year.
Picking up the slack are technology, industrial and consumer
discretionary sectors. Tech ETFs, which have had inflows of $1.2
billion so far in May, are set to see their biggest monthly inflow
since at least the start of 2012.
"We had this rush of yield-seekers over the past year, and that
translated into flows into utilities, telecommunications stocks and
consumer staples," said David Lutz, head of ETF trading strategy at
Stifel Nicolaus. "Now we're seeing a rotation away from the sectors
where these yield-seekers had favored. If the economy is improving,
people are saying, 'Let's get into the high-powered cyclicals that
have so far been lagging'."
Rising interest rates are helping fuel the exodus. Last week,
Fed Chairman Ben Bernanke said the central bank could take a first
step toward trimming its $85 billion a month bond-buying program at
one of its next few meetings if the economy continues to improve.
The U.S. 10-year Treasury bond yield is now at 2.104%, up nearly
half a percentage point on where it started the month.
"There is a correlation between interest rates and utilities
since they are fixed-income surrogates," said Scott Davis,
portfolio manager for Columbia Management's $8.6 billion dividend
income fund. "Historically, people buy them for the yield, so we'd
expect to see cost adjustments as bonds become more competitive
again."
Further compounding the declines in utility-sector stocks this
week was a downbeat reading on future electricity prices. On
Friday, results of an annual auction used to set power prices
across 13 states in 2016 and 2017 came in lower than expected, in
part because rising supply from natural-gas fired power plants,
according to PJM Interconnection, a regional power-grid
operator.
"Prices were down fairly significantly, and that caught people
by surprise," said Mr. Davis. The auction prompted a series of
stock-recommendation rating downgrades from Wall Street analyst in
share of companies like Exelon Corp. (EXC) and FirstEnergy Corp.
(FE), both down at least 7.5% so far this week.
Bearish sentiment about the utility sector spilled in the
options market, where traders were loading up on bets for further
declines. On Wednesday, the number of the Utility Select Sector's
ETF put options, which tend to profit from declines in shares, hit
the highest number on record, according to options-data provider
Trade Alert.
Write to Christopher.Dieterich@dowjones.com
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