Year-to-date, the Utilities ETF (NYSEARCA:XLU) has appreciated 21% and the big two telecoms, AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ), have also appreciated more than 20%. Those are amazing returns especially including the above-average dividend yields utilities and telecoms typically offer.
However, with the bid up prices, it has become riskier to invest new money in utilities and telecoms.
The top five utilities in the XLU are all overvalued, including NextEra Energy Inc (NYSE:NEE), Duke Energy Corp (NYSE:DUK), Southern Co (NYSE:SO), Dominion Resources, Inc. (NYSE:D), and American Electric Power Company Inc (NYSE:AEP).
Reversion to the mean can happen for any of these utilities that are overvalued, and it could mean negative returns in the short term.