Amid global uncertainty, instability in the financial markets and a low interest rate environment, the appeal for the utility sector has returned this year. In fact, this is the best performing sector from a year-to-date look with most stocks flying high.
Being the 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 in turbulent times. In addition, it is less impacted by a strong dollar due to its lack of foreign exposure (read: 3 Utility ETFs in Focus on Market Downturn).
Low commodity prices, which reduce the input costs of these companies, are like a tailwind. As utilities stocks require huge infrastructure, which creates a massive debt burden and the resultant interest obligation on these companies, these stocks outperform in a lower rate environment. The trend is likely to continue at least in the near term as chances of the next interest rate hike in March have faded.
Further, with falling Treasury yields, investors are piling up utilities across the board in search of juicy yields. This is especially true as utilities offer solid dividend payouts and excellent capital appreciation over the longer term. Apart from these, the sector is benefiting from an ever-expanding population, which is fueling the demand for utility supplies like water, gas and electricity.
Moreover, the upside in this corner of the space could be confirmed by the Zacks Industry Rank, as half of the industries have a solid Rank in the top 38% at the time of writing.
Given this, utility ETFs have been hitting 52-week highs in recent trading sessions. Any of the following funds could be solid picks for investors to ride out the surge in the current rocky market. These products have gained over 8% so far this year and carry a favorable Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (see: all the Utilities ETFs here):
Utilities Select Sector SPDR (XLU - Free Report)
With AUM of $7.8 billion, this fund provides exposure to a small basket of 31 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top 10 holdings at 60.1% of assets. Electric utilities takes the top spot in terms of sectors at 57.6%, closely followed by multi utilities (39.1%). The product charges 14 bps in annual fees and sees a heavy volume of more than 13.5 million shares on average. XLU climbed to a 52-week high of $47.09 per share.
Vanguard Utilities ETF (VPU - Free Report)
This ETF follows the MSCI US Investable Market Utilities 25/50 Index, holding 82 securities in its basket. It puts nearly 48.1% of total assets in the top 10 holdings, suggesting moderate concentration. More than half of the portfolio is allocated to electric utilities, closely followed by multi utilities (33.8%). VPU is one of the popular and liquid ETFs with AUM of nearly $2 billion and average daily volume of roughly 173,000 shares a day. Expense ratio comes in at 0.10%. The ETF hit a new 52-week year high of $101.76 per share (read: 4 Utility ETFs Gaining Despite Lackluster Q4).
iShares U.S. Utilities ETF (IDU - Free Report)
This ETF tracks the Dow Jones U.S. Utilities Index and holds a basket of 59 securities with a slight tilt toward the top four firms that collectively make up for 27.5%. Here again, electric utilities dominates the portfolio at 53.1% followed by multi utilities (34.8%). It has amassed $779.4 million in its asset base while trades in a solid volume of 197,000 shares a day on average. The fund charges 44 bps in annual fees and hit a new 52-week high of $117.05 per share.
Guggenheim S&P 500 Equal Weight Utilities ETF (RYU - Free Report)
This ETF provides exposure to 34 utilities stocks with an equal weight methodology by tracking the S&P 500 Equal Weight Index Telecommunication Services & Utilities. Multi utilities and electric utilities make up for the top two sectors with 38% share each, while diversified telecom services also receive a double-digit allocation. The fund has been able to manage $166.5 million in its asset base while trades in a lower volume of around 30,000 shares a day. Expense ratio comes in at 0.40%. The ETF jumped to $78.21 per share to reach a new one-year high.
Fidelity MSCI Utilities Index ETF (FUTY - Free Report)
This fund provides exposure to 83 utilities stocks with AUM of $239.4 million. This is done by tracking the MSCI USA IMI Utilities Index. The ETF has moderate concentration as each firm holds less than 7.3% share in the basket. Here too, electric utilities and multi utilities are the top two sectors with 52.3% and 34% share, respectively. The ETF has 0.12% in expense ratio while volume is good at 132,000 shares a day. It surged to new one-year high of $30.14 per share.
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