Secret to Outperformance
There has to be more than a recession-proof product to pique investor's interest. The real secret to the XLU's period of stunning performance has nothing to do with the underlying business itself. In fact, it has nothing to do with the management teams or any decision they could respectively make. It all came down to interest rates and comparable yield. That's right, as yields crashed, the Utilities Select Sector SPDR ETF (NYSEARCA:XLU) would continue to gain luster in the eyes of shareholders.
I use the yield on the ten-year US Treasury as my north star when it comes to rates. In periods of rapidly declining rates, such as late 2018 through the early 2020 time frame, the XLU shined brightly. The XLU ran from $49 in April 2018, the peak in 10-year bond for this cycle up to $70 in early February of 2020.
Interest Rates are at Historically Low Rates
A valid question would be if the pattern mentioned above is valid, why did the sector sell-off hard in March and hasn't reclaimed its prior highs? The answer is the classic buy on the rumor sells on the news. The market will often move and price in an event before it occurs. In the case of XLU, I believe the lows in the interest rate cycle are upon us. As rates rise, it will serve as a stiff headwind impeding the XLU's ability to advance. A move higher in rates is correlated with a burst in economic activity - if the COVID-19 vaccine is widely distributed and accepted by the populace, a credible case can be made the economy will emerge from the COVID-19 induced shackles now upon it. A burst in growth would correlate with higher rates, not the optimal set-up for the XLU.
