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Can the Rally in Utilities ETFs Last?

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Utilities ETFs have been hovering around their one-year high levels on several factors. The space has beaten the S&P 500 in the past month with the largest utilities ETF Utilities Select Sector SPDR Fund (XLU - Free Report) losing 2% against about 8% slump in the S&P 500 (as of Sep 14, 2022).

The Fed has given hints of a faster and fatter Fed rate hikes, resulting in a spike in the short-term treasury yields. Rising rate concerns have weighed on businesses and consumers’ spending. Atlanta Fed’s the GDPNow model estimates for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 1.3% on September 9, down from 1.4% on September 7.

The long-term rates are falling in the United States on recessionary fears. This, in turn boosted the rate-sensitive sectors like utilities. It is a rate sensitive sector as it requires huge infrastructure which places a massive debt burden and the resultant interest obligation on its operators.

Plus, the utilities sector has come up with mostly encouraging results this earnings season. About 74.1% of the S&P 500 utilities companies beat on bottom line and 92.6% surpassed the top-line estimates. Earnings outlook is also bullish for the space (read: Utilities Earnings Decent in Q2: ETFs in Focus).

Rising power and gas prices have also gone in favor of utilities companies. The index for utility gas service increased 3.5% in August after a decline of 3.6% in July. Electricity prices too added 1.5% in August after a 1.6% gain in July (read: 5 Sector ETFs to Win from August Inflation Data).

Can the Rally Last?

The utilities sector is a great investment for those seeking yields and safety but should be avoided by those expecting market-beating returns. It is among the most stable sectors over the long haul and its players are likely to be decent investments.

In current unsteady backdrop, current income could go a long way in protecting an investor’s portfolio. The highest yield (3.26%) provided by the space is via ProShares DJ Brookfield Global Infrastructure ETF (TOLZ - Free Report) . Vanguard Utilities ETF (VPU - Free Report) and iShares Global Utilities ETF (JXI - Free Report) yield about 3.07% and 2.97%, respectively.

We believe markets will remain edgy as long as inflation doesn’t come down materially and stay at that level for longer. Hence, investors can play the segment for some days more. Below we highlight a few utilities ETFs that are in momentum. These ETFs are:

ETFs in Focus

Virtus Reaves Utilities ETF (UTES - Free Report) – Up 2.33% Past Week (as of Sep 14, 2022)

The Virtus Reaves Utilities ETF seeks to provide total return through a combination of capital appreciation and income, primarily through investments in equity securities of companies in the utility sector. The fund charges 49 bps in fees and yields 1.87% annually.

iShares Global Utilities ETF (JXI - Free Report) – Up 2.18% Past Week

The underlying S&P Global 1200 Utilities (Sector) Capped Index measures the performance of companies that are part of the utilities sector of the economy. The fund charges 40 bps in fees and yields 2.88% annually.

iShares Global Infrastructure ETF (IGF) – Up 2.03% Past Week

The underlying iShares Global Infrastructure ETF seeks investment results that correspond generally to the price and yield performance of the S&P Global Infrastructure Index. The fund charges 40 bps in fees and yields 2.46% annually.

First Trust Utilities AlphaDEX Fund (FXU - Free Report) – Up 1.94% Past Week

The underlying StrataQuant Utilities Index is a modified equal-dollar weighted index designed by the AMEX to objectively identify and select stocks from the Russell 1000 Index that may generate positive alpha relative to traditional passive style indices through the use of the AlphaDEX screening methodology. The fund charges 64 bps in fees and yields 1.85% annually.

Invesco S&P 500 Equal Weight Utilities ETF (RYU - Free Report) – Up 1.94% Past Week

The underlying S&P 500 Equal Weight Telecommunication Services & Utilities Index equally weights stocks found in the utilities and telecommunication services sectors of the S&P 500 Index. The fund charges 40 bps in fees and yields 2.15% annually.

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