Utility ETFs Scaling New Highs

Although the broad stock market has staged a nice comeback from the worst first-half performance, volatility and uncertainty persist, and the utilities sector is making the most of it. No wonder, most utility stocks and ETFs are hitting fresh highs.

Utilities Select Sector SPDR XLUVanguard Utilities ETF VPUiShares U.S. Utilities ETF IDUFidelity MSCI Utilities Index ETF FUTY and Invesco DWA Utilities Momentum ETF PUI are the popular funds that are hit a new one-year high in the recent trading session. These products carry a Zacks ETF Rank #3 (Hold) (see: all the Utilities ETFs here).

Here, we discuss some strong reasons for the outperformance of the sector and ETFs. These factors are likely to fuel the rally in the coming weeks as well:

Defensive Investment

Being a low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or safe haven amid economic or political turmoil. Currently, the stock market is ruffled by various issues such as the lingering Russia-Ukraine conflict, a slowdown in China, inflationary pressure and recession fears.

Encouraging Fundamentals

Yields have declined over the past month. The 10-year Treasury yield currently stands at 2.89%, down from 3.04% a month ago. The drop in yields has compelled investors to flock to the utilities sector in search of juicy yields. This is especially true as utilities offer solid dividend payouts and excellent capital appreciation over the longer term (read: 5 Most-Loved Dividend ETFs of This Year).

The Fed hiked interest rates for the fourth consecutive time this year, taking the benchmark rate in the range of 2.25% and 2.5% to fight inflation. However, easing inflation coupled with recession fears has spurred bets for a less aggressive tightening policy.

Further, the sector is benefiting from an ever-increasing population, which is pushing up demand for utility supplies like water, gas and electricity.

Solid Zacks Rank

The upside to the utilities sector is confirmed by the Zacks Sector Rank in the top 25%, suggesting continued outperformance in the coming months.

ETFs in Focus

Utilities Select Sector SPDR (XLU)

With an AUM of $17.6 billion, Utilities Select Sector SPDR seeks to provide exposure to companies from the electric utility, water utility, multi-utility, independent power and renewable electricity producers, and gas utility industries. XLU follows the Utilities Select Sector Index, holding 29 stocks in its basket. Electric utilities take the top spot among sectors at 63.9%, closely followed by multi utilities (30.4%).

Utilities Select Sector SPDR charges 10 bps of annual fees and sees a heavy volume of 12.3 million shares, on average. XLU has rallied 9.8% in the year-to-date timeframe.

Vanguard Utilities ETF (VPU)

Vanguard Utilities ETF follows the MSCI US Investable Market Utilities 25/50 Index, holding 65 securities in its basket, with none accounting for more than 14% share. More than half of the portfolio is allocated to electric utilities, closely followed by multi utilities (27.6%).

Vanguard Utilities ETF charges 10 bps in annual fees and sees a good volume of around 254,000 shares on average. It has AUM of $6.3 billion and is up 9.2% this year.

iShares U.S. Utilities ETF (IDU)

iShares U.S. Utilities ETF tracks the Russell 1000 Utilities RIC 22.5/45 Capped Index. It holds a basket of 44 securities with a slight tilt toward the top firm at 13.6%, while others make up for less than 6.7%. Here again, electric utilities dominate the portfolio at 56.6%, followed by multi utilities (25.5%).

iShares U.S. Utilities ETF has amassed $1.1 million in its asset base while trades in a good volume of 117,000 shares a day on average. The fund charges 41 bps in annual fees and has gained 8.8% this year (read: Utilities ETF Hits New 52-Week High).

Fidelity MSCI Utilities Index ETF (FUTY)

Fidelity MSCI Utilities Index ETF provides exposure to 69 utilities stocks with AUM of $2.3 billion. This is done by tracking the MSCI USA IMI Utilities Index. Here too, electric utilities and multi utilities are the top two sectors with 59.2% and 27.6% share, respectively.

Fidelity MSCI Utilities Index ETF has 0.08% in expense ratio while the average daily volume is good at 417,000 shares a day. It has gained 9.2% so far this year.

Invesco DWA Utilities Momentum ETF (PUI)

Invesco DWA Utilities Momentum ETF offers exposure to 38 companies that are showing relative strength (momentum) and tracks the DWA Utilities Technical Leaders Index. Electric utilities and multi utilities account for 41.9% and 23.1% of assets, respectively, while gas utilities round off the next spot with double-digit exposure.

Invesco DWA Utilities Momentum ETF charges 60 bps in annual fees and sees a light volume of around 8,000 shares on average. It has AUM of $87.7 million and has gained 7.8% this year.

More By This Author:

5 Financial ETFs Outperforming The Market
5 Most-Loved Dividend ETFs Of This Year
What's In Store For Retail ETFs As Big-Box Q2 Earnings Unfold

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