Utilities: The Rodney Dangerfield of ETFs?

Eleanor Laise of WSJ.com reported on short positions that many investors are currently pursuing. Short positions occur when investors believe that an exchange-traded fund index is going to fall in value.

According to the WSJ Market Group, the three largest increases in "sector shorts" were:

April to May Percentage Increase for ETFs with At Least 100,000 Shares in Daily Trading Volume

Merrill Lynch Semiconductor HOLDRs (SMH) 40%
Merrill Lynch Retail HOLDRs (RTH) 44%
Utilities SPDR Select Sector (XLU) 47%

It may not be difficult to understand the percentage increase in the short positions of semiconductor or retail stock assets. One might surmise that demand for semiconductors tends to decrease in summertime months or that recent struggles in semis have led to more short interest. Similarly, retail tends to move according to seasonal patterns; it follows that trips to retailers are less vibrant in the summertime and/or the higher gasoline prices may hamper consumer purchasing in the summer months.

Yet, how might one begin to explain the desire to "bet against" utilities? In two years, XLU has handily outshined the SPDR S&P 500 benchmark (SPY)... by nearly 15%. (What's more, the Utilities sector is historically half as volatile/half as risky as the broader S&P 500!)

Granted, utilities used to be your grandparents' assets, as the companies often produced fat dividends. Today, those annual dividends are closer to 2.3% rather than 4.0%.

Still, for those who view the market as overvalued, utilities still tend to prove a safer haven than any other area of the stock market. And for those who see the stock market as a bargain, it's hard to argue against the strong run-up that utility stocks have experienced during the bargain bull market push.

One final contrarian thought regarding the bears/shorts/pessimists: They've been wrong for 4+ years. They will eventually have their days of disaster to say, "I told you so." However, most historical evidence has shown that the more bearish the investing public is on a given segment of the economy, the further the sector has to appreciate.

I can't predict the direction of XLU. Investors should be cautious enough to incrementally purchase as well as use a trailing stop-loss to protect dollars.

XLU vs. SPY 1-yr chart:

Disclosure Statement: As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above.