Utilities Catching a Bid

Not surprisingly, defensive market sectors have generally outperformed since the latest bout of market volatility hit in late April. Through yesterday, many cyclical sectors are down by double-digits since then; the S&P 500 is still down by about -10% from its high on 4/23. Meanwhile, defensive sectors like Consumer Staples and Telecom are only down a few percent. But Utilities are the big winners, up about a half a percent since the market made its high. In fact, it’s the only S&P sector with a positive gain since then.

It’s hard to pinpoint exactly why Utilities have been outperforming. The obvious answer is simply that investors are growing more cautious and are rotating to less cyclical market sectors to reflect that. But there may be other factors at work also. For instance, the current dividend yield on Utilities sector ETFs is more than 4%, which compares very favorably to the 10-year Treasury bond that has fallen back below 3%. It’s one of the larger differences between the two in the past few decades. In a yield-starved, volatile environment, Utilities just may be finding a sweet spot.

Chart: Utilities Sector ETF (red) vs. S&P 500 ETF (blue), with relative strength line (green)