Why Energy And Utility ETFs Are Crushing The Competition

Picking the best sector of the market in any given year can be tough, considering there are a multitude of factors that must align for your picks to come out on top.

This year, however, there is a neck-and-neck race for supremacy by both utility and energy stocks that may have considerable staying power for the remainder of 2014.

A mid-year checkup reveals that the Utility Select Sector SPDR (NYSE:XLU) and Energy Select Sector SPDR (NYSE:XLE) are far outstripping the broader market in total returns. Both ETFs have gained approximately 15.50 percent in 2014, while the SPDR S&P 500 ETF (NYSE:SPY) has notched a modest seven percent advance.

While XLU and XLE are basically on par in year-to-date performance, the paths to those gains has been markedly different.

Utility stocks made a big jump in the first quarter of the year, as a combination of falling interest rates and defensive repositioning led to significant inflows. According to recent data, XLU has gained over $1.1 billion in new assets so far this year.

Utilities are often considered a safe haven because of their strong dividend streams and non-cyclical business cycles. This makes them a preferred hiding spot when bullish momentum loses steam.

Heightened volatility and extended valuations in high beta sectors, such as consumer discretionary stocks, also played a big role in this flight to quality.

Energy stocks, on the other hand, have been flying more recently because of the strength in oil prices. The United States Oil Fund (NYSE:USO) has gained nearly 11 percent in 2014 on the back of high demand, shrinking supplies and geopolitical uncertainty in the Middle East.

The 47 large energy stocks that make up XLE are typically very sensitive to changes in oil and natural gas prices, because those changes directly impact their margins. Investors have clearly taken notice of this strength, as over $3.3 billion in new money has been injected into XLE over the last six months.

While the second half of the year may see new sector themes emerge, the fundamental drivers of strength in XLU and XLE could continue in earnest. Higher oil prices and fear of a market correction may help support these sectors throughout the remainder of 2014.