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4 Utility Mutual Funds to Combat Brexit Induced Volatility
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U.K.’s vote last week to leave the European Union (EU) triggered a massive sell-off among U.S. stocks that are mostly perceived to be risky assets. Given the risk-off sentiment, sectors mostly known as defensive plays including utilities were the best performers.
Their ability to provide juicy dividends at times when bond yields are falling, thanks to Brexit woes, is making them more attractive. Hence, the time is right to invest in mutual funds having significant exposure to such stocks.
Brexit Belies Economic Prudence
British voters ignored common wisdom and the advice of notable economists to vote in favor of an exit. Market pundits had warned that a Brexit will negatively affect financial conditions and the global economy.
U.S. stocks are suffering from a serious case of “Brexit Blues.” U.K’s decision to leave the EU continued to weigh on risky assets around the world on Monday, including U.S. stocks. All the three main indexes fell at least 1.5% yesterday, posting their worst two-day decline since late-August.
On Friday, thanks to Brexit, the S&P 500 and the Dow had wiped out year-to-date gains and were off more than 3% at the end of the session, while the fear-gauge CBOE Volatility Index (VIX) jumped to its highest percentage rise since Aug 8, 2011. Investors feared that such an outcome will destabilize the region’s economy, slow down global growth and create fresh bouts of gyration in the financial markets worldwide.
While almost all the sectors of the S&P 500 were found to be bleeding, it was the utility sector that defied the downtrend and ended in the green in the last two trading sessions. The Utilities Select Sector SPDR ETF (XLU - Free Report) at one point was up 1% on Friday, while the sector gained 0.8% yesterday.
Given the bloodbath in the markets, such a performance was an impressive feat, to say the least. So, what’s driving this sector higher, while the other sectors are tumbling? It is without a doubt the quest for higher yield and safety that is propelling investors to the utilities.
Brexit Turmoil Highlights Dividend Plays
A flight to safety due to the uncertainty created by the U.K. vote last week has driven bond prices into the stratosphere. Bonds are mostly seen as a safe-haven play, which in turn dragged down bond yields. The yield on the benchmark 10-year Treasury note plunged about 11.6 basis points to 1.461%, its lowest level since July 2012. In fact, treasury yields have been declining for the past four weeks leading up to the referendum on Thursday.
The decline in treasury yields has made utility companies more attractive as they tend to offer comparatively high and stable dividend yields. According to FactSet, the implied annual dividend yield for Dow utilities is 3.1%, more than the S&P 500’s dividend yield of 2.3%. It is also more than double compared to the 10-year treasury yield.
It is obvious that the utility sector belongs to the defensive camp. Since the Brexit induced market turmoil is expected to continue, demand for stocks from this sector will be on the rise due to their lower volatility and more predictable cash flow streams (read: If You Seek a Stable Portfolio? Utilities Are a Must).
Buy 4 Best Utility Mutual Funds Now
For these aforementioned reasons, investing in mutual funds having exposure to stocks from the utility sector will be a judicious decision. Additionally, the Fed had kept interest rates unchanged this month. Thanks to Brexit issues, it is unlikely the Fed will stick to its 2016 rate path.
In a persistently low interest rate environment, companies that are part of the utility sector stand to benefit the most. This is because conventional wisdom says that if rates remain low then it would be good for utility stocks, which generally have a huge amount of debt to service. A decrease in the debt level will also have a positive impact on their credit ratings (read: 4 Utility Mutual Funds in Play as Fed Keeps Rates Unchanged).
Funds have been selected over stocks, since funds reduce transaction costs for investors. Funds also diversify their portfolio without the numerous commission charges that stocks need to bear. (read: The Advantages Of Mutual Funds).
We have selected four such utility mutual funds that have a whopping year-to-date and 1-year return, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), offer a minimum initial investment within $2,500 and carry a low expense ratio.
Fidelity Advisor Utilities I (FUGIX - Free Report) invests the majority of assets in securities of companies deriving a majority of their revenues from utility operations. FUGIX’s year-to-date and 1-year returns are 16.1% and 11.1%, respectively. Annual expense ratio of 0.81% is lower than the category average of 1.15%. FUGIX has a Zacks Mutual Fund Rank #2.
Invesco Dividend Income Y (IAUYX - Free Report) invests primarily in stocks of companies that generate and distribute natural gas or electricity, as well as in companies that provide telecommunications services. IAUYX’s year-to-date and 1-year returns are 8.3% and 10.4%, respectively. Annual expense ratio of 0.87% is lower than the category average of 1.10%. IAUYX has a Zacks Mutual Fund Rank #2.
Fidelity Telecom and Utilities (FIUIX - Free Report) invests a large portion of its assets in securities of telecommunications service and utility companies. FIUIX’s year-to-date and 1-year returns are 15.5% and 8.7%, respectively. Annual expense ratio of 0.74% is lower than the category average of 1.15%. FIUIX has a Zacks Mutual Fund Rank #2.
American Century Utilities Investor (BULIX - Free Report) invests the majority of its assets in equity securities of companies engaged in the utilities industry. BULIX’s year-to-date and 1-year returns are 18.7% and 19.7%, respectively. Annual expense ratio of 0.67% is lower than the category average of 1.15%. BULIX has a Zacks Mutual Fund Rank #1.
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the help of Zacks Rank.
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4 Utility Mutual Funds to Combat Brexit Induced Volatility
U.K.’s vote last week to leave the European Union (EU) triggered a massive sell-off among U.S. stocks that are mostly perceived to be risky assets. Given the risk-off sentiment, sectors mostly known as defensive plays including utilities were the best performers.
Their ability to provide juicy dividends at times when bond yields are falling, thanks to Brexit woes, is making them more attractive. Hence, the time is right to invest in mutual funds having significant exposure to such stocks.
Brexit Belies Economic Prudence
British voters ignored common wisdom and the advice of notable economists to vote in favor of an exit. Market pundits had warned that a Brexit will negatively affect financial conditions and the global economy.
Fed Chair Janet Yellen had said that such a move would “usher in a period of uncertainty” and fuel volatility in world markets (read: Brexit Wins, But at what Cost to British Firms?).
Brexit Weighs on U.S. Stocks, Except Utilities
U.S. stocks are suffering from a serious case of “Brexit Blues.” U.K’s decision to leave the EU continued to weigh on risky assets around the world on Monday, including U.S. stocks. All the three main indexes fell at least 1.5% yesterday, posting their worst two-day decline since late-August.
On Friday, thanks to Brexit, the S&P 500 and the Dow had wiped out year-to-date gains and were off more than 3% at the end of the session, while the fear-gauge CBOE Volatility Index (VIX) jumped to its highest percentage rise since Aug 8, 2011. Investors feared that such an outcome will destabilize the region’s economy, slow down global growth and create fresh bouts of gyration in the financial markets worldwide.
While almost all the sectors of the S&P 500 were found to be bleeding, it was the utility sector that defied the downtrend and ended in the green in the last two trading sessions. The Utilities Select Sector SPDR ETF (XLU - Free Report) at one point was up 1% on Friday, while the sector gained 0.8% yesterday.
Given the bloodbath in the markets, such a performance was an impressive feat, to say the least. So, what’s driving this sector higher, while the other sectors are tumbling? It is without a doubt the quest for higher yield and safety that is propelling investors to the utilities.
Brexit Turmoil Highlights Dividend Plays
A flight to safety due to the uncertainty created by the U.K. vote last week has driven bond prices into the stratosphere. Bonds are mostly seen as a safe-haven play, which in turn dragged down bond yields. The yield on the benchmark 10-year Treasury note plunged about 11.6 basis points to 1.461%, its lowest level since July 2012. In fact, treasury yields have been declining for the past four weeks leading up to the referendum on Thursday.
The decline in treasury yields has made utility companies more attractive as they tend to offer comparatively high and stable dividend yields. According to FactSet, the implied annual dividend yield for Dow utilities is 3.1%, more than the S&P 500’s dividend yield of 2.3%. It is also more than double compared to the 10-year treasury yield.
It is obvious that the utility sector belongs to the defensive camp. Since the Brexit induced market turmoil is expected to continue, demand for stocks from this sector will be on the rise due to their lower volatility and more predictable cash flow streams (read: If You Seek a Stable Portfolio? Utilities Are a Must).
Buy 4 Best Utility Mutual Funds Now
For these aforementioned reasons, investing in mutual funds having exposure to stocks from the utility sector will be a judicious decision. Additionally, the Fed had kept interest rates unchanged this month. Thanks to Brexit issues, it is unlikely the Fed will stick to its 2016 rate path.
In a persistently low interest rate environment, companies that are part of the utility sector stand to benefit the most. This is because conventional wisdom says that if rates remain low then it would be good for utility stocks, which generally have a huge amount of debt to service. A decrease in the debt level will also have a positive impact on their credit ratings (read: 4 Utility Mutual Funds in Play as Fed Keeps Rates Unchanged).
Funds have been selected over stocks, since funds reduce transaction costs for investors. Funds also diversify their portfolio without the numerous commission charges that stocks need to bear. (read: The Advantages Of Mutual Funds).
We have selected four such utility mutual funds that have a whopping year-to-date and 1-year return, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), offer a minimum initial investment within $2,500 and carry a low expense ratio.
Fidelity Advisor Utilities I (FUGIX - Free Report) invests the majority of assets in securities of companies deriving a majority of their revenues from utility operations. FUGIX’s year-to-date and 1-year returns are 16.1% and 11.1%, respectively. Annual expense ratio of 0.81% is lower than the category average of 1.15%. FUGIX has a Zacks Mutual Fund Rank #2.
Invesco Dividend Income Y (IAUYX - Free Report) invests primarily in stocks of companies that generate and distribute natural gas or electricity, as well as in companies that provide telecommunications services. IAUYX’s year-to-date and 1-year returns are 8.3% and 10.4%, respectively. Annual expense ratio of 0.87% is lower than the category average of 1.10%. IAUYX has a Zacks Mutual Fund Rank #2.
Fidelity Telecom and Utilities (FIUIX - Free Report) invests a large portion of its assets in securities of telecommunications service and utility companies. FIUIX’s year-to-date and 1-year returns are 15.5% and 8.7%, respectively. Annual expense ratio of 0.74% is lower than the category average of 1.15%. FIUIX has a Zacks Mutual Fund Rank #2.
American Century Utilities Investor (BULIX - Free Report) invests the majority of its assets in equity securities of companies engaged in the utilities industry. BULIX’s year-to-date and 1-year returns are 18.7% and 19.7%, respectively. Annual expense ratio of 0.67% is lower than the category average of 1.15%. BULIX has a Zacks Mutual Fund Rank #1.
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the help of Zacks Rank.