August is living up to its historical reputation of being tricky for U.S. stocks. The eighth month of the year is one of the worst for the S&P 500, which could be why one of the index's most conservative sectors is thriving this month. Month to date, the Utilities Select Sector SPDR (XLU), the largest utilities exchange-traded fund (ETF) by assets, is up 1.8%, while the S&P 500 is lower by nearly 2%. XLU is by the best performing member of the sector SPDR ETF suite this month. Underscoring the strength in the utilities sector, the only ETFs that hit record highs last Friday were utilities funds.
In addition to XLU, the Vanguard Utilities ETF (VPU), Fidelity MSCI Utilities Index ETF (FUTY) and iShares U.S. Utilities ETF (IDU) accomplished that feat. XLU is now up 12.2% year to date compared with 8.6% for the S&P 500. That is an arguably surprising performance when considering that investors have largely preferred higher-beta, cyclical sectors this year and given utilities' historical sensitivity to rising interest rates. Historically, no sector is as inversely correlated to rising Treasury yields as utilities, making the sector's 2017 performance surprising against the backdrop of two interest rate hikes by the Federal Reserve. (See also: The 4 Largest Utilities ETFs.)
Interestingly, today's solar eclipse could provide a catalyst for the utilities sector and the aforementioned ETFs. "Power bulls could meanwhile enjoy a rally in wholesale electricity prices due to solar's sudden slide," reports Bloomberg. "The eclipse will start curbing solar a little after 9 a.m., just when the work week is ramping up and demand is taking off. According to energy data provider Genscape Inc., the event may extend the typical period of high power prices in California by about two hours."
XLU tracks the Utilities Select Sector Index and holds 30 stocks. The ETF has a dividend yield of 3.14%, which is well above the comparable yield on the S&P 500 and 10-year Treasuries. That explains why many income investors are often attracted to the utilities sector, but that high yield also reminds investors about the sector's vulnerability to rising interest rates. (See also: How Utilities ETFs Deal With Rising Rates.)
Year to date, investors have not been enthusiastic about XLU, as highlighted by outflows of $180 million from the ETF. However, that tide is turning in the third quarter, as XLU has added $138.2 million in new assets. VPU, the Vanguard rival, has added almost $59 million in new money this year. (See also: Utility Funds: A Bright Choice in Bear and Bull Markets.)