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Why Hedge Funds Have a Dull Outlook on the Market in 2H17

PART:
1 2 3 4 5 6 7 8 9 10
Part 7
Why Hedge Funds Have a Dull Outlook on the Market in 2H17 PART 7 OF 10

Is Utility Sector Signaling a Potential Drop?

Performance of the utility sector

The utility segment also contributed significantly to the recent market rally. The Utilities Select Sector SPDR Fund (XLU), which tracks the performance of the utility sector, rose nearly 7.2% in the first half of 2017. On a year-to-date basis, this ETF rose nearly 13.8% as of August 25, 2017.

Is Utility Sector Signaling a Potential Drop?

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Interest rate and the utility sector

The utilities sector is generally sensitive to interest rate movements. When interest rates rise, it affects the cost of capital of the sector. The sector is highly dependent on debt for its operations and infrastructure developments. It uses borrowed capital for its day-to-day operations.

Utility stocks are generally high-dividend-paying stocks. Since they’re high-yielding instruments, investors generally prefer this sector during market turmoil. Recently, we saw that the S&P 500 Index (SPY) (QQQ) fell nearly 1.5% between August 15, 2017, and August 21, 2017. The XLU ETF rose nearly 1% during the same period. Many strategists warned that this sector breakdown could lead to a potential market fall in the near future.

NextEra Energy (NEE), Duke Energy (DUK), Dominion Energy (D), and Southern Corporation (SO) represent nearly 10.2%, 8.2%, 7.2%, and 7.1% of the XLU ETF, respectively. These stocks returned nearly 26.4%, 12.1%, 4.8%, and -1.7%, respectively, on a year-to-date basis, as of August 25, 2017.

In the next part of this series, we’ll analyze the performance of the healthcare sector in the first half of 2017.

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