The disappointing start to the New Year not only affected the major benchmarks, but also dragged down their performance to negative territory over a one-month period. The Dow and S&P 500 lost 6% and 5.8% over the period, respectively. Meanwhile, the Nasdaq, which clearly outperformed other benchmarks last year, declined by 8% over the past one month. In this bearish environment, demand for securities from sectors that provide a safer option increased gradually.

The utility sector, which is considered to be one of the safe haven sectors, managed to remain in the green despite market downturn while the other major sectors found it difficult to finish in the positive territory. Though the utility sector was affected by the overall negative tone to decline a marginal 0.4% so far this year, the broader S&P 500 utility fund – Utilities Select Sector SPDR ETF (XLU) – gained a modest 1.2% over the past one-month period. Also, XLU managed to attract net inflow of $63.1 million this year (read: 6 ETFs to Play in Q1).
 
Market Downturn
 
Worries regarding weak Chinese economy and slump in oil prices were the main reasons behind the market downturn since the start of 2016. Weak Chinese economic data including decline in the Caixin China services purchasing managers’ index (PMI) and Caixin manufacturing PMI raised concerns about decelerating growth in the world’s second largest economy. China’s central bank guided the yuan to a five-year low in off-shore trading on Wednesday, which raised expectations of further weakness in the Chinese economy.
 
Moreover, global oil prices continued to plunge after bearish economic data from China raised concerns about demand for oil in an already oversupplied market. Both the WTI crude and Brent crude declined to 12-year lows yesterday. Meanwhile, news regarding a spike in motor gasoline stockpiles by 10.6 million barrels in the U.S. last week and Saudi Arabia deciding to offer a substantial oil discount to Europe added to the worries (read: Oil and Energy ETFs That Hit All-Time Lows).
 
North Korea’s claim that the country successfully carried out a nuclear test on Wednesday also added to the bearish sentiment. The move was viewed as a challenge for U.S. foreign policy and raised questions about China’s ability to control its volatile ally.
 
Utility – A Safer Option
 
As discussed earlier, the utility sector is believed to offer a safer option when the market is suffering from a high level of volatility. Relatively higher immunity against market peaks and troughs makes the sector less volatile than others. Meanwhile, due to lack of foreign exposure it is also expected to be less exposed to a stronger dollar. Also, low commodity prices are believed to reduce input costs of the companies from the sector (read: Forget REITs, Invest in Utility ETFs Instead?).
 
The sector generally offers strong yields, which may also attract investors to allocate their investments here. Also, after declining significantly in 2015, utility ETFs now offer a favorable valuation which is likely to boost this sector in the near term. Though the sector was believed to be affected by the rise in key interest rate as it requires a high level of debt for its operations, the Fed’s commitment of a gradual rise in interest rate helped to mitigate some of the rate-hike concerns (read: Fed Finally Hikes Rates: Quality ETFs & Stocks to Buy Now).
 
3 Utility ETFs to Watch

These favorable factors are poised to boost the utility sector in the coming months while the markets continue to suffer from bouts of volatility. Hence, we have highlighted three utility ETFs that registered modest gains over the past one month and are poised to remain on the same track at least in the near term. These three ETFs also have a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
 
Vanguard Utilities ETF (VPU - ETF report)
 
This fund tracks the MSCI US IMI Utilities 25/50 Index. In total, it holds 82 securities in its basket with 47.4% of its assets invested in the top 10 holdings. Electric Utilities occupies the top position from a sector look at 52.2% while Multi-Utilities takes the next position with 34% of its assets. The fund is quite popular in its space with $1.7 billion AUM and an impressive daily average volume of 151,000 shares. VPU charges only 12 bps in annual fees. The ETF gained nearly 1.6% over the past one-month period and has an annual dividend yield of 3.6%.
 
iShares US Utilities (IDU - ETF report)
 
This ETF provides exposure to 59 securities by tracking the Dow Jones U.S. Utilities Index. It is highly concentrated in the top 10 holdings with nearly half of its assets invested in these securities. With respect to sector holdings, Electric Utilities again takes the top spot at 53.4%, followed by Multi-Utilities (34.7%). The product has managed assets worth $589.6 million and trades in a solid volume of nearly 173,000 shares a day. It has an expense ratio of 0.43% and returned 0.7% over the past one month. The ETF has an annual dividend yield of 4.2%.
 
Guggenheim S&P 500 Equal Weight Utilities ETF (RYU - ETF report)
 
This fund offers exposure to a basket of 34 stocks by tracking the S&P 500 Equal Weight Index Telecommunication Services & Utilities Index. It is pretty well spread out across components with none of the securities holding more than 3.16% of assets. From a sector look, the fund is tilted toward Multi-Utilities and Electric Utilities with 38.4% and 38.3% of its assets allocated to them, respectively. The fund has amassed $119.3 million in its asset base and trades in a volume of around 21,000 shares a day on average. It charges an expense ratio of 40 bps and has an annual dividend yield of 4.1%. RYU gained nearly 0.5% in the past one month.