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Utility Sector: Will Investors Continue Their Defensive Positions?

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Dec. 4 2020, Updated 10:52 a.m. ET

Performance of the utility sector

The utility sector is one of the important sectors of the S&P 500 Index (SPX-INDEX) (SPY). The Utilities Select Sector SPDR ETF (XLU), which tracks the performance of the utility sector, rose 2.7% in November 2017. On a year-to-date basis, it has risen 15.6% as of November 30, 2017.

Major utility stocks NextEra Energy (NEE), Duke Energy (DUK), Dominion Energy (D), and Southern Corporation (SO) returned 2.5%, 2%, 4.6%, and -0.8%, respectively, in November 2017.

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In the previous part of this series, we saw that investors are taking some of their money out of high-growth stocks such as technology (XLK) and semiconductors. They’re also rotating their positions. With the expectation of an interest rate hike at the Fed’s December 2017 meeting, more money is going into the financial sector (XLF) (VFH).

However, investors are also continuing their positions in defensive sectors such as utilities and pharmaceuticals (XLV). Currently, the expectation that the tax reform bill will pass Congress is increasing. But any negative news on the bill could add value to investors’ positions in these defensive sectors.

Gradual rate hike

The gradual rate hike process the Fed is taking could affect the performance of the utility sector since utility companies largely depend on debt for their day-to-day operations. A higher interest rate could affect the cost of capital of these utilities and thus affect the overall performance of the utility sector.

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

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