Utilities have been the top performing sector among the S&P 500 industry groups this year. However, ringing a caution bell, a Bloomberg report suggests that option traders believe the Bull Run of the sector may be halted. The report notes that bearish puts have outnumbered the bullish by 2:1 in exchange traded funds that track bellwethers like Duke Energy Corporation (DUK) and Exelon Corporation (EXC).
Bloomberg data notes there are “2.3 puts for every outstanding call on the Utilities Select Sector SPDR Fund”. This ratio had reached the highest level since 2007, in June. Option traders are thus guarding against potential losses.
In fact, the Utilities Select Sector SPDR ETF (XLU) has experienced volatility in the last one month and lost 0.7% since Jun 16 till Jul 15. This is in sharp contrast to the sector’s year-to-date robust run.
The Sector Shows Highest YTD Gain
Utilities are claimed to have returned the best gains to investors since 2000. Utilities Select Sector SPDR ETF (XLU) has gained 12.1% so far this year; the highest among the 10 S&P 500 industry groups. Energy Select Sector SPDR ETF (XLE) is the next best performer with YTD gains of 11.7%.
However, the sector has been witnessing some volatility in the last one month. XLU has ranged between a low of $42.34 and a high of $44.26.
Rate Hike Impact on Utilities
The utilities sector has generally been considered to include widow-and-orphan stocks. These are stocks that pay high dividends and pose less risk. The utilities often compete against the bonds to lure investors looking for a stable income.
The latest minutes from the Federal Open Market Committee’s (:FOMC) June 17-18 meeting suggests that the central bank is in no rush to hike interest rates. However, the Federal Reserve decided to end its asset purchases with a final reduction of $15 billion at its October meeting. Till that time, the Federal Reserve plans to trim its bond purchases by $10 billion at each meeting.
Earlier, St. Louis Fed president James Bullard had commented that he believes the central bank may hike interest rates by early 2015.
Nonetheless, it is true that the rate hike would eventually happen sooner or later, and we are approaching that time. On that note, a chief investment strategist told Bloomberg that higher interest rate would make the Utilities less attractive.
Separately, Morningstar's equity analysts consider utilities to be overvalued at the moment.
Changes in Utilities Sector
The industry has seen a vast change in the face of new regulatory moves, price volatility, changing demand and the entry of new players. The big monopolies now do not necessarily run the entire show from generating power to retailing. Investopedia lists the allocation of supplier segments as Generators, Energy Network Operators, Energy Traders and Marketers and Energy Service Providers and Retailers.
Challenges for Utilities Sector
Despite the assured demand for services, the utilities have to constantly meet the high expectations of its wide customer base, adapt to a changing global economic scenario, and upgrade technologies to meet stringent environmental norms. In fact, new technologies to produce power at a cheaper rate and emerging alternative resources for the generation of green power are inevitable requirements for the industry’s growth.
3 Utilities Funds to Sell Now
Below we will share with you 3 Utilities funds that carry either a Zacks Mutual Fund Rank #4 (Sell) or Zacks Mutual Fund Rank #5 (Strong Sell) as we expect the funds to underperform its peers in the future.
Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.
Gabelli Utilities A (GAUAX) seeks to provide high return through current income and capital growth. The fund invests a large portion of its assets in readily marketable US and non-US utility companies that pay dividends. These companies are believed to have potential to offer current income or capital growth. A maximum of 40% of assets may be invested in foreign issuers.
Gabelli Utilities A currently carries a Zacks Mutual Fund Rank #5 (Strong Sell).
The fund has an expense ratio of 1.37% as compared to category average of 1.20%. The fund also carries a maximum front end sales load of 5.75%. The fund has lost 2.3% since Jun 30.
ICON Utilities A (ICTVX) seeks growth of capital in the long run. The fund parks most of its assets in securities of utilities companies. The fund may invest in utilities companies of any market capitalization. The fund is non-diversified.
ICON Utilities A currently carries a Zacks Mutual Fund Rank #5 (Strong Sell).
The fund has an expense ratio of 1.74% as compared to category average of 1.20%. The fund also carries a maximum front end sales load of 5.75%. The fund has lost 3.1% since Jun 30.
Wells Fargo Advantage Utility & Telecom A (EVUAX) invests majority of its assets in stocks and investment grade bonds or convertible debentures of utility and telecommunications companies. A maximum of 35% of the assets are invested in convertible debentures. Also, a maximum of 30% of assets are invested in equities of non-US issuers that may include ADRs. And not more than 20% will be invested in equities belonging to emerging markets.
Wells Fargo Advantage Utility & Telecom A currently carries a Zacks Mutual Fund Rank #4 (Sell).
The fund has an expense ratio of 1.14% as compared to category average of 1.20%. The fund also carries a maximum front end sales load of 5.75%. The fund has lost 2.6% since Jun 30.
Read the analyst report on GAUAX
Read the analyst report on ICTVX
Read the analyst report on EVUAX
Read the analyst report on DUK
Read the analyst report on EXC
Read the analyst report on XLU
Read the analyst report on XLE
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