The best-performing sector of 2014 may surprise you


Many investors were bearish on utilities stocks heading into this year after the sector lagged the S&P 500 in 2013. Expectations of rising interest rates and continued risk-on sentiment were key components of the bearish thesis, but that hasn’t exactly happened.

Utilities Select Sector SPDR Fund (XLU) is actually the best performer among the nine major U.S. sectors so far this year — and it isn’t even close.

The utilities ETF is up more than 11% for the year-to-date period, and was actually rising to new all-time highs on Tuesday amid weakness in the overall market.

The outperformance of the utilities sector isn’t something that the bulls want to see. Utilities are seen as a defensive sector that investors tend to flock to during times of heightened uncertainty in the market. The strength of utilities stocks also suggests interest rates could be heading lower, not higher.

The chart below shows the relative performance of the utilities versus the S&P 500, and the sector’s recent strength.

Meanwhile, the underperformance of consumer cyclical stocks is another worrying sign for the health of the overall market and the broad economy.

Consumer Discretionary Select Sector SPDR ETF (XLY)  is the worst performer of the nine major sectors so far this year with a loss of nearly 6%. The relative performance chart below illustrates this fact.

Finally, the recent outperformance of another defensive sector, Consumer Staples Select Sector SPDR ETF (XLP), suggests that investors are moving more toward a risk-off posture.

Photo credit: Matthew Youngberg via Flickr Creative Commons.

DISCLAIMER: The investments discussed are held in client accounts as of January 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.