Will Utility Stocks Continue to Outperform?

Source: Thinkstock

Source: Thinkstock

The best performing sector so far this year has been the utilities. The SPDR Utility ETF (NYSEARCA:XLU) is up over 9 percent for the year while the broader market is essentially flat.

Utilities tend to outperform in a weak market. This is because they have very stable business models with recurring revenues. They also tend to pay a large portion of their profits out in dividends, so when investors are looking for yield, they often turn to utilities. Also, when bond yields go down, that makes other yielding assets — such as dividend paying stocks — more attractive by comparison. Thus, utilities are a way for investors to piggy-back the strength in bonds while retaining equity exposure, and the correlation should remain intact unless the stock market crashes.