Utility ETFs Scale New Highs Amid Rising Volatility

Volatility is rearing its ugly head and the utilities sector is making the most of the uncertainty. No wonder, most utility stocks and ETFs are hitting fresh highs. The S&P 500 Utilities Index has gained 7.4% so far this quarter.

Here, we discuss some strong reasons for the outperformance of the sector. 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 U.S.-China trade woes, political instability in Europe, a persistent slowdown in China, troubles in the emerging market, deteriorating economic growth in developed markets and concerns over a global slowdown. However, positive trade talks and booming U.S. economy are acting as tailwinds.

Encouraging Fundamentals

Utilities require huge infrastructure, which creates a massive debt burden and interest obligation., These stocks outperform in a lower rate environment and thus the Fed’s dovish view lifted the space.

Powell recently said that interest rates were "just below" the level that would be neutral for the economy — meaning they will neither speed up nor slow down economic growth. This is in contrast to October remarks — the rate was “a long way” from neutral — which led to worries that the rate increases will crimp growth. Additionally, the subsequent minutes from the central bank's latest meeting suggests that the Fed will likely raise rates this month but may stall rate hikes next year.

Further, 10-year Treasury yields have declined this month after hitting a seven-year high in November. Investors are piling up utilities in the hope of juicy yields. This is especially true as utilities offer solid dividend payouts and excellent capital appreciation over the longer term.

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