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Utility ETFs Skyrocket on Market Volatility and Low Rates

Sweta Killa

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 all-time highs. The S&P 500 Utilities Index has gained nearly 4% so far this month (read: 5 Beaten Down ETFs & Stocks to Buy Now).

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 a safe haven amid economic or political turmoil. Currently, the stock market is ruffled by various issues, such as U.S.-China trade conflict, low inflation, political unrest in Hong Kong, weak global data and recession fear.  

Encouraging Fundamentals

Utilities require huge infrastructure as it creates a massive debt burden and interest obligation. These stocks outperform in a lower rate environment and thus Fed’s rate cut for the first time in more than a decade lifted this space.

Further, with the collapse of bond yields, 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. Notably, the U.S. Treasury yield curve temporarily inverted on Aug 13 for the first time since June 2007 as 10-year yields broke below the 2-year ones, thereby signaling recession woes for the world’s biggest economy (read: Don't Fear Yield Curve Inversion, Play These Top ETFs Instead).
 
Additionally, the sector is benefiting from an ever-increasing population, which is pushing up demand for utility supplies like water, gas and electricity.

ETFs

Given the bullish fundamentals, we have highlighted a few utility ETFs that hit an all-time high in the 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 $10.3 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top firm with 12.6% share while other firms hold no more than 8% of assets. Electric utilities take the top spot in terms of sectors at 60.8%, closely followed by multi utilities (32.6%). The product charges 13 bps in annual fees and sees a heavy volume of around 17.6 million shares on average. XLU has climbed to a new high of $62.08 per share.

Vanguard Utilities ETF VPU

This ETF follows the MSCI US Investable Market Utilities 25/50 Index, holding 69 securities in its basket with none accounting for more than 10.5% share. More than half of the portfolio is allocated to electric utilities, closely followed by multi utilities (29.9%). VPU charges 10 bps in annual fees and sees a light volume of around 27,000 shares on average. It has AUM of $4 billion and hit a new high of $137.95 per share (read: Mixed Q2 Earnings Results Put Utility ETFs in Focus).

Fidelity MSCI Utilities Index ETF FUTY

This fund provides exposure to 68 utilities stocks with AUM of $775.3 million. This is done by tracking the MSCI USA IMI Utilities Index. The ETF has moderate concentration as each firm holds no more than 10.8% share in the basket. Here too, electric utilities and multi utilities are the top two sectors with 56.3% and 29.7% 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 $40.77 per share.

iShares U.S. Utilities ETF IDU

This ETF tracks the Dow Jones U.S. Utilities Index. It holds a basket of 48 securities with a slight tilt toward the top firm at 11.2% while others make up for less than 7.1% share. Here again, electric utilities dominate the portfolio at 57.3% followed by multi utilities (30.8%). It has amassed $877.2 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 $156.33 per share.

Invesco S&P 500 Equal Weight Utilities ETF RYU

This ETF provides exposure to 28 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 50.7% and 35.3% share, respectively. The fund has been able to manage $366.3 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 $102.52 per share, reaching an all-time high (read: Safe-Haven ETFs Rally on Global Unrest: ETFs to Snap Up).

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