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Have Utilities Lost Their Allure after the Unusual Rally in 2016?

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Utilities: the sweet spot in 2016

The utilities (XLU) sector remains the top performing sector so far in 2016. Investors took shelter from the volatile broader equity markets to relatively safer utilities in the last twelve months. But the high-yielding utility sector, which offers low but steady returns even during market turmoil, also kept giving conservative investors regular gains.

Utilities have gained more than 12% year-to-date, outperforming broader equities by a huge margin. The steep rally of utilities has also offset investor losses from last year.

Have Utilities Lost Their Allure after the Unusual Rally in 2016?

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Utilities’ double bonanza

The chart above shows how utilities have taken the interest rate developments in the US well, surpassing the SPDR S&P 500 (SPY). Utilities not only offered handsome capital gains but kept yielding higher than other sectors. Duke Energy (DUK), Southern Company (SO), and PPL Corporation (PPL) offered more than 4% dividend (DVY) yields—well above the industry average.

Interestingly, utilities still seem enticing, even though they’re overvalued. Meanwhile, macroeconomic conditions could continue to fuel volatility in equity markets, and this uncertainty is helpful for utilities and can bring more upside in the future. This means that investors might consider utilities as a relatively low-risk investment avenue that has the power to continue outshining broader markets in the near future.

In this series, we’ll discuss what factors led to the 2016 rally among utilities as well as which factors will likely drive the sector going forward. Let’s begin with a comparison of this sector with other sectors so far in 2016.

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