Utility & REIT Funds Come Roaring Back

July 11, 2014

The popular equity income plays have turned in excellent 2014 performance so far but remain sensitive to interest rate hikes.

History doesn’t repeat itself, but it often rhymes, as the saying goes.

That’s the dark cloud hovering over rosy performance numbers delivered recently by two popular income plays.

Both utilities and REITs provided excellent performance in the first half of 2014 following rocky third and fourth quarters of 2013. The Utilities Select Sector SPDR Fund (XLU | A-92) led the pack of SPDR sector ETFs as the table below shows:

6 mo Sector Rtns

REITs don’t fit neatly into the “select sector” list because they’re a subset of financials. Still, REITs turned in solid first-half 2014 performance of their own, as reflected in the 17.7 percent total return from the largest REIT ETF, the Vanguard REIT ETF (VNQ | A-88).

Utilities and REITs hold appeal as income producers, with yields of 3.69 percent and 3.44 percent for VNQ and XLU, respectively, over the past 12 months, beating that of the broad market proxy SPDR S&P 500 ETF (SPY | A-98).

yield & rtn table

Indeed, it’s the income component of their return that goes a long way toward explaining their recent rags-to-riches performance. The sectors’ steady cash flows helped them look more bondlike to investors, and midway through 2013, investors sold off as interest rates spiked. Uncertainty about Federal Reserve policy kept returns uneven through December.

But in 2014 to date, higher interest rates haven’t materialized. On the contrary, rates have dipped or held steady as the massive stimulus from central banks outside the U.S. has kept Treasury demand high despite tapered purchases from the Fed.


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