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Utility ETFs Scale New Highs Amid Rising Volatility

Volatility is rearing its ugly head and the utilities sector is making the most of the uncertainty. No wonder, most utility stocks and ETFs are hitting fresh highs. The S&P 500 Utilities Index has gained 7.4% so far this quarter.

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

Defensive Investment

Being a 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 various issues such as U.S.-China trade woes, political instability in Europe, persistent slowdown in China, troubles in the emerging market, deteriorating economic growth in developed markets and concerns over global slowdown. However, positive trade talks and booming U.S. economy are acting as tailwinds (read: Top and Flop ETFs at Half-Way Q4).

Encouraging Fundamentals

Utilities require huge infrastructure, which creates a massive debt burden and interest obligation., These stocks outperform in a lower rate environment and thus Fed’s dovish view lifted the space.

Powell recently said that interest rates were "just below" the level that would be neutral for the economy — meaning they will neither speed up nor slow down economic growth. This is in contrast to October remarks — the rate was “a long way” from neutral — which led to worries that the rate increases will crimp growth. Additionally, the subsequent minutes from the central bank's latest meeting suggests that the Fed will likely raise rates this month but may stall rate hikes next year.

Further, 10-year Treasury yields have declined this month after hitting a seven-year high in November. 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 (read: Top Sector ETFs of 2018).

Apart from these, the sector is benefiting from an ever-increasing population, which is pushing up demand for utility supplies like water, gas and electricity.

Solid Zacks Rank

The upside to the utilities sector is confirmed by the Zacks Sector Rank in the top 44%, suggesting continued outperformance in the coming months.

ETFs

Given the bullish fundamentals, we have highlighted a few utility ETFs that hit new one-year highs in recent trading session. Any of the following funds could be solid picks for investors to ride out the current rocky market. These products carry a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see: all the Utilities ETFs here):

Utilities Select Sector SPDR XLU

With AUM of $8.1 billion, this fund provides exposure to a small basket of 29 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top firm with 11.5% share while other firms hold no more than 8.6% of assets. Electric utilities take the top spot in terms of sectors at 61.7%, closely followed by multi utilities (32.7%). The product charges 13 bps in annual fees and sees a heavy volume of around 17.6 million shares on average. XLU has a climbed to a new high of $57.18 per share and has gained 7.1% this quarter (read: Utilities ETF Hits New 52-Week High).

Invesco DWA Utilities Momentum ETF PUI

This fund offers exposure to 31 companies that are showing relative strength (momentum) and tracks the DWA Utilities Technical Leaders Index. It holds 31 stocks in its basket with each making up for less than 4.3% share. Electric utilities and multi utilities account for 39.1% and 24.9% of assets, respectively, while gas utilities round off the next spot with double-digit exposure. The ETF charges 60 bps in annual fees and sees light volume of around 27,000 shares on average. It has AUM of $103.8 million and hit a new high of $31.40 per share. PUI surged 9.3% in the same time frame.

Fidelity MSCI Utilities Index ETF FUTY

This fund provides exposure to 70 utilities stocks with AUM of $514.9 million. This is done by tracking the MSCI USA IMI Utilities Index. The ETF has moderate concentration as each firm holds no more than 9.7% share in the basket. Here too, electric utilities and multi utilities are the top two sectors with 56% and 30% share, respectively. The ETF has 0.08% in expense ratio while average daily volume is good at 164,000 shares a day. It surged to a new high of $35.71 per share, having gained 6.7% so far this quarter (read: Utility ETFs Gain Amid Stock Market Decline).

iShares U.S. Utilities ETF IDU

This ETF tracks the Dow Jones U.S. Utilities Index. It holds a basket of 51 securities with a slight tilt toward the top firm at 10% while others make up for less than 7.5%. Here again, electric utilities dominate the portfolio at 56.6% followed by multi utilities (30.8%). It has amassed $779.2 million in its asset base while trading in moderate volume of 89,000 shares a day on average. The fund charges 43 bps in annual fees and hit a new high of $144.73 per share. It is up 6.7% this quarter so far.

Invesco S&P 500 Equal Weight Utilities ETF RYU

This ETF provides exposure to 29 utilities stocks with an equal weight methodology by tracking the S&P 500 Equal Weight Index Telecommunication Services & Utilities Index. Electric utilities and multi utilities make up for the top two sectors with 50.2% and 38.6% share, respectively. The fund has been able to manage $274.3 million in its asset base while trading in lower volume of around 27,000 shares a day. Expense ratio comes in at 0.40%. The ETF jumped to $95.85 per share to reach a new one-year high and added 7.7% in the same timeframe.

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