The hot sector that could be massively overheated

Investors have typically flocked to the utilities sector during unstable markets, but could it be time for them to look elsewhere?

Utilities are up 12.1 percent in the past year, climbing over 14 percent since January when it was the only sector of the S&P 500 that didn't fall. Looking at the dividends, however, the utilities ETF (XLU) is not boasting the relatively high numbers that usually characterize the sector and draw in investors.

In fact, some traders are now urging investors to look at market opportunities that hinge on other sectors, helping them find relatively high yields.

"If you're a believer that we've seen at least stabilization within crude, pick an MLP ETF like AMLP, which yielded several weeks ago at 9 percent," Cowen trader David Seaburg said on CNBC's "Power Lunch." "I think that if you're a believer in a bottom you can see this thing move up in price and have a nice yield return there."

At the Ira Sohn Conference on Wednesday, Doubleline Capital's Jeffrey Gundlach suggested shorting utilities and buying mortgage REITs, predicting that the differential between the 3 percent yield in the former (based on the XLU ETF) and the 11 percent yield in the latter (based on the REM) will begin to converge.

Read MoreGoodbye utilities stocks, hello financials: Matrix CIO

But not everyone is on board with the bond man's trade, including Fort Pitt Capital portfolio manager Kim Forrest.

"First of all, anything with a high dividend is a warning to you that there's risk in that instrument," she said. "What I don't think regular retail investors understand is that the REITs pay out the dividends based on the operating cash flows. So they go up, they go down, this isn't a steady dividend like they're used to."


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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