Time To Buy Beaten Down Utility ETFs?

The utility sector has had a great run so far with global growth slowdown, geopolitical turmoil, unimpressive domestic data, see-sawing oil prices, the unseen impact of Brexit and high broad-based volatility that haunted the markets but increased the appeal for utility stocks. Another factor that drove the utility stocks that offer solid dividend payouts and excellent capital appreciation over the longer term was low yields on bonds across the globe (read: Global Treasury Yields Dive: Play These Sector ETFs).

However, the uncertainty in the markets related to the U.S. elections has subsided with Donald Trump winning the election. The U.S. president-elect plans to increase economic stimulus, which will not only boost growth but also lead to higher inflation. Subdued inflation and growth concerns were among the major factors keeping the bond yields low.


Thus, since the election results were announced, yields on debt instruments across the globe including in the U.S., UK, Germany and Japan were raised from record lows. Fixed income investors are said to have lost nearly $1 trillion owing to this movement.

The above mentioned factors have tarnished the appeal for utility ETFs. Utilities Select Sector SPDR Fund (XLU - Free Report) , Vanguard Utilities ETF (VPU - Free Report) , iShares U.S. Utilities ETF (IDU - Free Report) and Fidelity MSCI Utilities ETF (FUTY - Free Report) were all in red over the last five days as of November 14, 2016.

A Turnaround in the Cards?

However, with uncertainty related to Trump’s new policies, movement of oil price and defensive nature of utility stocks, these ETFs could see a reversal of trend in the coming days. Utilities provide basic services like electricity, gas and water that are always in demand, and this is their most fundamental strength. Their ability to boost shareholders’ value through consistent dividend payments makes them all the more attractive. Apart from that, the defensive nature of operations insulates these ETFs from market turbulence. Thus, the time is ripe to focus on utility ETFs that capture the benefits of individual utility stocks and pass them on to the investors (read: Utility ETFs to Shelter Portfolio from Market Turmoil).

Below we discuss four of these ETFs, holding a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see all Utilities/Infrastructure ETFs here).

ETFs in Focus

Utilities Select Sector SPDR Fund

XLU is one of the most popular products in the space with nearly $6.6 billion in AUM and average daily volume of roughly 15.7 million shares. The fund tracks the Utilities Select Sector Index and holds 30 stocks. Sector-wise, Electric Utilities (62.2%) dominates the fund followed by Multi-Utilities (33.7%). The fund charges 14 bps in investor fees per year. The ETF has witnessed a loss of 5.7% in the past five days (read: ETF Strategies for Q4).
 

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