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Utilities ETFs Outperforming on Stability, Dividends

tlydon@globaltrend.com (Tom Lydon)

Utilities ETFs are outperforming the S&P 500 by a wide margin since the beginning of May on Eurozone worries and as investors move away from riskier sectors and favor defensive ETFs.

For example, Utilities Select Sector SPDR (XLU - News) is known for its low volatility. The consistent distributions paid to investors is another plus in a down market. XLU has a dividend yield of 3.76%, according to manager State Street Global Advisors.

The ETF XLU has returned 0.6%  year-to-date, compared to the broad market S&P 500 at – 6% year-to-date. The utility sector was the one major sector to end the month of May in positive territory, reports  Daniel Putnam for InvestorPlace. The fund includes companies from the following industries: electric utilities; multi-utilities; independent power producers & energy traders; and gas utilities. [Utilities ETFs for Dividends, Stability]

This ETF is well-suited to be a core holding in a portfolio, but has also proved merit in a sector rotation strategy. There are often big differences between performance of various sectors of the economy.

Although the U.S. stock market is faring well, the shadow of the Eurozone debt crisis is still looming, and the possibility of a Greek exit from the euro currency is creating a fear factor in the market. Defensive sectors such as utilities are popular with investors during times of uncertainty. [Utilities ETFs Lag Market After 2011 Rally]

Products in this sector are useful and necessary for daily living, such as water and power, giving the sector stable demand, reports Eric Dutram for ETF Daily News. The stable yield from XLU is also attractive, and is profitable given the low expense ratio of 0.18% . [Defensive ETFs for a Market Pullback]

As Treasury yields are below 1.8%, the need for capital appreciation is top priority for investors. Most utility companies that XLU holds pay out a nice, stable distribution.

Utilities Select Sector SPDR

Tisha Guerrero contributed to this article.