This sector just had a historic run – but may no longer be an attractive pick

The utilities sector just logged four-straight weeks in the green, and is positive on the year, but some market watchers say names in the space might not be the best picks right now.

The exchange-traded fund tracking the utilities sector (XLU) rose 4 percent last week for its best one-week performance since summer of 2015, leading the market as the best-performing sector for the week.

But Erin Gibbs, equity chief investment officer at S&P Global, said that while the sector isn't very expensive at current levels — trading slightly above its three-year forward price-to-earnings ratio — it is expected to yield the worst profits growth this year.

In fact, utilities are the only group expected to yield negative or contracting profit growth for 2017, according to S&P Global data.

"That, combined with potentially raising interest rates — that hurts utilities on a two-fold basis. One, it makes dividend yields look less attractive; and two, they're capital-intensive — they're going to have higher borrowing costs. So we just don't see it as a strategic play for 2017," Gibbs said Friday on CNBC's "Trading Nation."

Funds currently have record underweight positioning in staples and utilities — two traditionally defensive sectors — and near-record lows in telecom, according to a new report from Bank of America Merrill Lynch's U.S. equity and quantitative strategy team.

The rise in utilities stocks comes as bond yields sink, with the 10-year Treasury yield approaching a three-month low on Friday. A direct relationship between Treasury yield and high-dividend stocks may or may not make economic sense, but it remains the case that when bond market returns become less attractive, investors appear to show a preference for high-dividend payers. The XLU offers a yield of more than 4 percent, more than double that of the ETF SPY, which tracks the whole S&P 500.

Integrated power company NRG Energy is the best-performing stock in the sector so far this year, up 42 percent. Shares of the stock surged last week after Paul Singer's Elliott Management said it has partnered with investment firm BlueScape Energy Partners to push for changes at the NRG.


Trades to Watch

Trader Bios


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

Read more