XLU: Utilities Sector Outperforms S 500 in August
August is history and the month tells a story of caution.
As the summer trading season was winding down, the Utilities Select Sector SPDR Fund (XLU) was up 6% over the previous four weeks, compared to little more than a 2% gain for the broader market proxy, the SPDR S&P 500 ETF Trust (SPY).
At the beginning of the month, the S&P 500 was trading only 1% below its all-time high reached just two weeks prior. By Aug. 5, SPY had fallen 10% as a combination of a weak jobs report and a Bank of Japan rate increase injected fears of recession and the end of the “carry trade,” where investors borrow yen at low rates and invest in higher-yielding currencies, profiting from exchange rate differences.
While SPY climbed higher to close in positive territory by the end of August, it was defensive sectors and safe-haven assets that won the month.
In addition to XLU, gold continued its 2024 winning streak with a 4% gain for the month, as measured by the SPDR Gold Shares ETF (GLD).
With a slowing economy and the historically volatile months of September and October upon us, this type of investor caution may have just begun.
XLU: Why the Attraction to Utilities Now?
Utilities sector stock ETFs like XLU have been leading the market performance due to several potential factors:
Defensive characteristics: The utilities sector is considered a defensive sector, meaning it is less susceptible to economic downturns. This makes them attractive to investors seeking stability and income during periods of market volatility.
Dividend yield: Utilities companies are known for their consistent dividends, which can provide a steady income stream, especially when interest rates are falling.
Bond alternative: When the economy is expected to slow, yields on bonds typically begin to fall, making them less attractive to fixed income investors while making steady dividend-paying utilities companies more attractive.
UItilities ETFs like XLU can be a good investment option when interest rates are expected to fall due to their combination of dividend income, defensive characteristics, and potential benefits from economic recovery.
Investors should remember, though, that utilities stocks and ETFs are not recession-proof and can decline in value during weak economic conditions.