Utilities Favor Betrays Confidence U.S. Growth Increasing

Investors plowed $1.22 billion into U.S. exchange-traded funds that hold utility stocks over the past five days, signaling skepticism that an economic recovery is strong enough to buoy interest rates.

Funds that hold the likes of Duke Energy Corp. and Southern Co. had the biggest inflows among ETFs that focused on industries such as technology, banking and consumer products as utility indexes beat the broader market.

Utility stocks tend to gain as interest rates fall because investors usually value them by comparing dividend yields with return on debt. Yields on U.S. Treasuries have declined as economists predict the Federal Reserve will keep its target rate close to zero another year, while tensions in Iraq boost the appeal of industries considered a safe investment.

“Investors are beginning to embrace more defensive sectors,” David Mazza, head of ETF research at State Street Corp. (STT), said in an interview yesterday. Military conquests in Iraq by Islamic insurgents over the past week probably fueled the trend, he said.

The Federal Reserve said today that while growth is bouncing back and the job market is improving, interest rates will stay low for “a considerable time” after it stops buying back bonds. It is on track to end the purchases by year-end.

Utility stocks responded. The 30-company S&P 500 Utilities Index rose 2.2 percent in New York, it’s biggest one-day gain since Sept. 18.

The average yield on U.S. 10-year Treasuries has declined 13 basis points, or 0.12 percentage point, this quarter.

ETF funds are gaining popularity as a way to invest in industries such as oil and gas at lower transaction costs.

Consumer ETFs

Funds holding consumer staples, another traditionally defensive sector, attracted about $700 million in fresh money over the past week as fighters of the Islamic State in Iraq and Levant swept government troops from cities.

Many investors “may be responding to interest rates that have moved lower,” said Ryan Issakainen, an ETF strategist at First Trust Advisors LP. The Iraq fighting or a bet that today’s Federal Open Markets Committee meeting will boost utility values may have spurred investor decisions, he said.

Record Inflows

The First Trust Consumer Staples (FXG) and First Trust Utilities (FXU) ETFs had record cash inflows June 16, according to data compiled by Bloomberg. State Street’s Utilities Select Sector SPDR was the best-performing sector ETF in the past week, attracting $468.4 million.

The skepticism isn’t unanimous, Issakainen said. First Trust still expects an economic rebound this year, he said.

ETFs that invest in energy companies such as Exxon Mobil Corp. attracted $273 million in new money over the past week raising this year’s inflow to $6.4 billion, the highest of any industry. Most of that money is a bet that economic recovery will drive up fuel prices, Mazza said.

To contact the reporter on this story: Jim Polson in New York at jpolson@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net Carlos Caminada

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