Utilities ETFs Hitting All-Time Highs Amid Market Turmoil

Volatility is rearing its ugly head, and the utilities sector is making the most of all the uncertainty that’s looming around. No wonder, most utility stocks and ETFs are hitting fresh highs. The S&P 500 utilities index has gained 12% so far this year and some strategists see further upside for the sector players.

Here, we discuss some strong reasons for the outperformance of the sector that are likely to fuel the rally in the coming weeks as well:

Defensive Investment

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 amid economic or political turmoil. Currently, the stock market is ruffled by political chaos, geopolitical tensions and stretched valuation though modest economic growth and strong earnings act as tailwinds.

Encouraging Fundamentals

As utilities 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 weak inflation might put the third interest rate hike for this year off the table.

Further, with falling Treasury yields, investors are piling up utilities in the hope 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 wave of mergers and acquisitions as well as deregulation is propelling stocks higher. Additionally, the sector is benefiting from an ever-increasing population, which is pushing up demand for utility supplies like water, gas and electricity.

Impressive Earnings

Utilities has been the second-best performing sector trailing construction, given its positive price reaction of 0.3% in response to the earnings announcement. The sector has shown impressive earnings growth of 7% on 7.7% higher revenues, with 69% beating EPS estimates and 58.6% topping revenue estimates.  

Solid Zacks Rank

The upside to the utilities sector is confirmed by the Zacks Sector Rank in the top 50%, suggesting continued outperformance in the coming months.

ETFs

Given the bullish fundamentals, most of the utility ETFs hit all-time highs in recent trading sessions. Any of the following funds could be solid picks for investors to ride out the current rocky market. These products have gained nearly 15% so far this year but carry an unfavorable Zacks ETF Rank #4 (Sell) with a Medium risk outlook:

Utilities Select Sector SPDR (XLU – Free Report)

With AUM of $7.8 billion, this fund provides exposure to a small basket of 30 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top four firms that collectively make up for 32.5% of assets while other firms hold no more than 5.23% share. Electric utilities take the top spot in terms of sectors at 62.2%, closely followed by multi utilities (33.2%). The product charges 14 bps in annual fees and sees a heavy volume of around 12 million shares on average. XLU climbed to a new high of $55.02 per share.

Vanguard Utilities ETF (VPU – Free Report)

This ETF follows the MSCI US Investable Market Utilities 25/50 Index, holding 76 securities in its basket. It puts nearly 50.1% 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 (29.3%). VPU is one of the popular and liquid ETFs with AUM of nearly $2.7 billion and average daily volume of more than 126,000 shares a day. Expense ratio comes in at 0.10%. The ETF hit an all-time high of $120.85 per share.

iShares U.S. Utilities ETF (IDU – Free Report)

This ETF tracks the Dow Jones U.S. Utilities Index and holds a basket of 52 securities with a slight tilt toward the top four firms that collectively make up for 28.5%. Here again, electric utilities dominate the portfolio at 58.3% followed by multi utilities (30.3%). It has amassed $740.8 million in its asset base while trades in a moderate volume of 96,000 shares a day on average. The fund charges 44 bps in annual fees and hit a new high of $137.65 per share.

Fidelity MSCI Utilities Index ETF (FUTY – Free Report)

This fund provides exposure to 75 utilities stocks with AUM of $291.7 million. This is done by tracking the MSCI USA IMI Utilities Index. The ETF has moderate concentration as each firm holds less than 8.5% share in the basket. Here too, electric utilities and multi utilities are the top two sectors with 57.4% and 29.1% share, respectively. The ETF has 0.08% in expense ratio while average daily volume is moderate at 85,000 shares a day. It surged to all-time high of $35.71 per share.