After witnessing a bullish run for the most part of 2016, the utility sector encountered a broad-based sell-off especially after Donald Trump won the election. The U.S. President-elect plans to increase economic stimulus, which is likely to push long-term interest rates higher. Bank of America Merrill Lynch estimates that the 10-year Treasuries will yield 2.65% by the end of 2017. Higher bond rates usually are inversely proportional to utility valuations (read: Utility ETFs: More Pain Ahead?).
Additionally, the Federal Reserve’s hiking of interest rates in December and hints of an aggressive fiscal policy ahead did not help the case of utility ETFs either. The Fed raised the benchmark interest rates by 25 bps to 0.50–0.75%, citing the U.S. economy’s growth momentum and a strengthening labor market. The Fed expects three rate hikes each in 2017, 2018 and 2019. Several members of the Fed's Federal Open Market Committee are of opinion that the rate hikes could come more frequently than anticipated.
Though the above-mentioned factors have tarnished the appeal for utility ETFs, utilities provide basic services like electricity, gas and water that are always in demand, and this is their most fundamental strength. Their ability to boost shareholders’ value through consistent dividend payments makes them all the more attractive. Apart from that, the defensive nature of operations insulates these ETFs from market turbulence.
There is still a lot of uncertainty in the market that could make the global equities go berserk. As a result Utility ETFs –– Utilities Select Sector SPDR Fund (XLU - Free Report) , Vanguard Utilities ETF (VPU - Free Report) , iShares U.S. Utilities ETF (IDU - Free Report) and Fidelity MSCI Utilities ETF (FUTY - Free Report) have gained 4.1%, 3.8%, 3.8% and 3.9%, respectively, in the last one month as of January 6, 2017 (read: Utility ETFs to Shelter Portfolio from Market Turmoil).
While the global growth slowdown, geopolitical turmoil, a strong dollar, see-sawing oil prices, the unseen impact of Brexit and high broad-based volatility continue to haunt the markets, these increase the appeal for utility stocks. Meanwhile, Fed chair Janet Yellen has taken a cautious stance. She indicated that further hikes largely depend on what policies are brought in by Trump and how they impact the economy. This has put the limelight back on these utility ETFs (see all Utilities/Infrastructure ETFs here).
ETFs in Focus
Utilities Select Sector SPDR Fund: XLU is one of the most popular products in the space with nearly $7 billion in AUM and average daily volume of roughly 16.1 million shares. The fund tracks the Utilities Select Sector Index and charges 14 bps in investor fees per year (read: Sole Fed Hike of 2016 Put These ETFs in Focus).
Vanguard Utilities ETF: This ETF tracks the MSCI US Investable Market Utilities 25/50 Index. The fund holds 77 stocks in its basket and has amassed almost $2.3 billion in its asset base. It trades in a moderate volume of 232,000 shares per day. The fund has a low expense ratio of 0.10%.
iShares U.S. Utilities ETF: The fund follows the Dow Jones U.S. Utilities Index and holds 52 stocks in its basket. The fund manages an asset base of around $694.4 million and exchanges about 162,000 shares per day. It is a bit expensive with 44 bps in annual fees (read: Time to Take a Break from These Overvalued Sector ETFs?).
Fidelity MSCI Utilities ETF: This ETF tracks the MSCI USA IMI Utilities Index. The fund holds 74 stocks in its basket. The fund has amassed almost $181.8 million in its asset base and trades in a moderate volume of 99,000 shares per day. It has an expense ratio of 0.084%.
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