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What is in Store for These Utility ETFs this Earnings Season?

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Global growth slowdown, geopolitical turmoil and high broad-based volatility were haunting the markets from the very start of the year. The latest driver to volatility came in from Britain’s decision to leave the EU, which has had a knock-on effect, driving yields on government bonds to record lows (read: Are Boring ETFs the Best Bet This Season?).

While rates were already low on a global scale, earlier this month, 10-year note yields dropped to its lowest level in the last three years. Meanwhile, the 10-year UK gilt also touched a record low on challenging outlook and lackluster service sector data. Germany, France, Switzerland and Australia have all seen new lows in yields for their 10-year benchmarks this month. Japan too is in the negative zone (read: Global Treasury Yields Dive: Play These Sector ETFs).

This raised the appeal for utility stocks, which offer solid dividend payouts and excellent capital appreciation over the longer term. Further, thanks to the sector’s low correlation with the market, huge swings in the stock market don’t have any effect on utility stocks. The utility sector is thus considered a defensive play or safe haven in turbulent times.

In fact, utility ETFs saw smooth trading with Utilities Select Sector SPDR (XLU - Free Report) ,Vanguard Utilities ETF (VPU - Free Report) , iShares Dow Jones US Utilities (IDU - Free Report) and Fidelity MSCI Utilities ETF (FUTY - Free Report) gaining about 12% each in the last three months (as of July 22, 2016).

Investors must be interested to know how the sector might be performing in the second-quarter 2016 earnings season to help them make an investment decision.

Although utility stocks are yet to release their results, as per the Zacks Earnings Trend report, it is one of the few sectors that are expected to show earnings growth in the quarter. Utilities are expected to post earnings growth of 20.9% in the second quarter compared with a decline of 2.3% in first-quarter 2016.

However, just looking at the overall sector outlook is not enough. Let’s also look at how the individual stocks to which the utility ETFs have significant exposure are expected to perform. We have highlighted the earnings prediction for some of these companies below (see: all Utilities/Infrastructure ETFs here):

Zacks Surprise Prediction

NextEra Energy (NEE - Free Report) is expected to release its earnings report on July 27 before market opens. It has a Zacks Rank #4 (Sell) but an Earnings ESP of +0.63%, putting the odds of a beat against it. The company however saw upward earnings estimate revision of 3 cents over the past 7 days for the to-be-reported quarter. It delivered positive earnings surprises in three of the last four quarters, with an average beat of 4.82%. Further, the stock has a VGM score of ‘D’. NEE has a combined 31.9% weight in the above mentioned four utility ETFs.

Duke Energy Corporation (DUK - Free Report) has a Zacks Rank #3 (Hold) and an Earnings ESP of +1.98%, making a beat likely. However, the earnings surprise track over the past four quarters is not good with a negative average surprise of 4.40%. Meanwhile, the company witnessed downward earnings estimate revision of 2 cents over the past 7 days for the yet-to-be-reported quarter. The stock has a VGM of ‘C’. The company will report on Aug 4, before market opens. DUK has a weight of 8.4%, 7.4%, 7.7% and 7.5% in XLU, VPU, IDU and FUTY, respectively.


Dominion Resources, Inc. (D - Free Report) has a Zacks Rank #3 and an Earnings ESP of -1.41%, making an earnings prediction difficult. The Zacks Consensus Estimate for second-quarter 2016 is 71 cents. Further, the stock has an unfavorable VGM score of D. The company is expected to report before market opens on Aug3. D has a combined weight of 24.6% in the above mentioned four ETFs.

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