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Utilities ETFs Providing Shelter From Equity Market Storms

This article was originally published on ETFTrends.com.

Investors that embrace the utilities sector and exchange traded funds such as the Utilities Select Sector SPDR (XLU) often do so for two reasons: Above-average dividend yields and reduced volatility.

During the recent bout of market volatility, utilities ETFs lived up to their shelter from the storm reputation. Over the past 90 days, XLU, the largest utilities ETF by assets, is up 3 percent while the S&P 500 is lower by 5.4 percent.

The utilities sector was suppose to be a throw away investment as many anticipated a strong economy with a full labor market to push up interest rates, which traditionally weighed on the bond-like utilities stocks.

However, with inflation relatively under control and benchmark Treasury yields still stuck around 3%, utilities remain attractive for yield hunters. Moreover, after the recent bout of volatility, investors are still still looking at the bond-esque sector as a safe way to remain the game and generate some extra dividends on the side.

Related: Stable, Defensive Sector ETFs for a Wobbly Market

Interesting Data on Utilities Sector

While utilities stocks can outperform during periods of elevated market volatility, historical data indicate the sector is also a winner over longer holding periods.

“The S&P 500 utilities sector has been the best during the post-September market turmoil and has ranked second for 2018 through Nov. 26. But if you look at the longer periods, the total returns exceed those of the entire S&P 500 for all periods except for 10 years,” according to MarketWatch.

Recently, Morgan Stanley has upgraded the utilities sector to Outperform, arguing that stock prices aren’t keeping pace with earnings growth so far in 2018, which suggests the market participants may be subtly pricing in slowing earnings growth down the line.

“The 15-year and 20-year returns give evidence to the importance of the utilities sector: People and companies need those services in what is a critical industry protected by regulators. Utilities also reward investors with steady dividend payouts,” notes MarketWatch.

Investors have added nearly $424 million to XLU in the fourth quarter.

Rivals to XLU include the Vanguard Utilities ETF (VPU) , Fidelity MSCI Utilities Index ETF (FUTY) , iShares U.S. Utilities ETF (IDU) and Reaves Utilities ETF (UTES) .

For more information on the utilities sector, visit our utilities category.