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Utilities ETFs Hit Highs as U.K. Falls Hard

Zacks Equity Research

Two days after the Brexit decision, the global market meltdown continues, butchering risky assets and triggering a flight to safety. Britain’s exit from the European Union (EU) seems to be the most expensive divorce as the global market bled over $2 trillion in paper wealth on June 24. The figure outpaced the previous single-day sell-off record worth $1.9 trillion in September 2008.

Analysts are now seeing Brexit as “the biggest global monetary shock since 2008” while some are viewing it as the 'worse than any bear market you’ve seen in your lifetime'. Notably, just after the Brexit decision, a whirlwind of rating and projection downgrade attacked the British economy, be it for its credit rating or economic growth.

Most analysts have predicted that the U.K. economy will slip into a recession by next year. As per IMF, the UK-EU divorce would fuel inflation, weighing on GDP. Also, the IMF has forecast that this break-up will instigate a stock market rout – like what we are witnessing now, a property market collapse and a crash in the financial market.

Weaker terms of trade are also being feared by analysts. Moreover, the IMF cautioned about a global slowdown due to Brexit. In fact, the event will likely delay the Fed’s policy tightening action for the coming few months.

Why Investors Flock to Safety?

Such a downbeat global investing outlook has caused a broad-based sell-off. Investors should note that the U.K. ETF EWU lost 15.5% in the last two days (as of June 27, 2016), while the S&P 500-based ETF SPY lost over 5.3%, the all-world ETF ACWI fell about 7.1%, the emerging market ETF EEM plunged about 7.3%, the developed market ETF VEU retreated over 9.4% and the Euro zone ETF EZU lost over 13.5% (read: Beat Brexit-Induced Sell-Off via These Inverse ETFs).

Meanwhile, the British currency pound dived to a 31-year low. Such a bloodbath has understandably opened the window of opportunity for safe equity sectors and assets (read: Safe Haven ETFs Surge on Brexit Fears).

Utility – A Safer Option
The utility sector is a safer option when the market is tottering. Relatively higher immunity against market peaks and troughs makes the sector less volatile than others. Its lack of foreign exposure also exposes it less to any global market rout.
Also, since the sector generally offers strong yields, investors may be attracted to allocate their investments here. Investors should note that the benchmark 10-year Treasury yield slumped to a four-year low lately. On June 27, 2016, the yield on 10-year U.S. Treasury was 1.46%, down from 2.24% seen at the start of the year. This brightens the appeal for the high dividend utility investing (read: 3 Safe High Dividend ETFs to Beat the Volatile Market).

With the Fed expected not to act ahead on policy tightening to cope with the negative repercussions of Brexit, the second half of 2016 will likely be entirely for utility ETFs. This is especially true as the sector is affected by a rise in the key interest rate as it borrows heavily for its operations. Thus a low-yield environment is blessing for utilities.

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. We have highlighted five utility ETFs below that hit a 52-week high on June 27 (see: all the Utilities ETFs here):

Vanguard Utilities ETF VPU – Up 18.4% YTD (as of June 27, 2016); yields 3.77%

Fidelity MSCI Utilities ETF FUTY – Up 17.9% YTD; yields 3.05%

iShares US Utilities IDU – Up over 18.2% YTD; yields 3.49%

Utilities Select Sector SPDR ETF XLU – Up 17.9% YTD; yields 3.21%

PowerShares DWA Utilities Momentum ETF PUI – Up 20.4% YTD; yields 2.55%

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SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
SPDR-UTIL SELS (XLU): ETF Research Reports
PWRSH-DW UTL MO (PUI): ETF Research Reports
VIPERS-UTIL (VPU): ETF Research Reports
ISHRS-MSCI ACWI (ACWI): ETF Research Reports
ISHARS-EMU IDX (EZU): ETF Research Reports
ISHARS-US UTIL (IDU): ETF Research Reports
FID-UTILITY (FUTY): ETF Research Reports
ISHARS-UTD KING (EWU): ETF Research Reports
VANGD-FTSE AWLD (VEU): ETF Research Reports
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