Utilities ETF Failed Conservative Investors This Week

Quick. Name the worst-performing of the nine Selector Sector SPDRs funds issued by State Street Global Advisors this week. Following an election result that was largely viewed as unfavorable to the energy space, a logical guess would be the Energy Select Sector SPDR (NYSE:XLE). On the same basis, the Financial Services Select Sector SPDR (NYSE:XLF) makes for a fine guess as well.

Some might even say the answer is the Technology Select Sector SPDR (NYSE:XLK) due to continued weakness in shares of Apple (NASDAQ:AAPL). All would be wrong. By far the worst-performing of the nine sector SPDRs this week is the Utilities Select Sector SPDR (NYSE:XLU).

XLU, which is home to nearly $5.8 billion in assets under management, has been prized by investors for a decent dividend yield (currently almost 3.8 percent) and its low-beta ways that have led the fund to be the least correlated of the sector SPDRs to the S&P 500 over the past several years.

XLU has not been too intimately correlated to the benchmark index this week because the utilities fund has plunged almost 4.1 percent compared to a loss of 2.2 percent for the SPDR S&P 500 (NYSE:SPY).

XLU was trading slightly above $37 earlier this week, but with less than two hours to go in Friday's session, the ETF appears unlikely to close above $35. One reason for the decline could be the fact that a lofty valuation is finally coming home to roost.

In July, Benzinga reported that XLU, other utilities ETFs and the underlying components in those funds were trading at the high end of their historical valuations. The argument at that time was those valuations were forced higher by investors chasing yield, making ETFs such as XLU vulnerable to declines.

Last month, it was noted U.S. utilities were also richly valued relative to foreign equivalents.

XLU currently sports a price-to-earnings ratio of 14.46 and a price-to-book ratio of 1.46, implying the fund still resides near the high end of its historical valuation. Adding to the bear case for XLU are the facts that the ETF is now almost nine percent removed from its 52-week high and trading below its 200-day moving average.

An alternative for investors still craving utilities exposure could be the WisdomTree Global ex-US Utilities Fund (NYSE:DBU). That ETF is not as frothy on a valuation basis, offers exposure to both developed and developing markets and features a 30-day SEC yield that is 85 basis points higher than XLU's. This week, DBU has outperformed XLU by about 160 basis points. DBU is also the better performer over the past 30 and 90 days.

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