ETFs
Here’s why utility ETFs are hitting new highs – May 10, 2024
During the last rally fueled by renewed hopes of lower rates, the utilities sector outperformed. The ultra-popular Utilities Select SPDR sector (XLU – Free report) has risen double digits since April 16, compared to a 2.3% rise for the S&P 500 index.
This is especially true as the sector, which tends to outperform when the economy is in recession, is taking full advantage of the current volatility and uncertainty triggered by the timing of Fed rate cuts, the slowdown of the economy and geopolitical tensions. It’s no wonder most utility stocks and ETFs are hitting new highs.
Utilities Select SPDR sector (XLU – Free report) , Vanguard Utilities ETF (Virtual virtual unit – Free report) , iShares US Utilities ETF (UDI – Free report) , Fidelity MSCI Utilities Index ETF (SMART – Free report) And Invesco Dorsey Wright Utilities Momentum ETF (PUI – Free report) are the popular funds that have hit a series of new one-year highs in recent trading sessions. These products carry a Zacks ETF Rank #3 (Hold) (see: all Utilities ETFs here).
Here we discuss some strong reasons for sector and ETF outperformance. These factors are also expected to fuel the recovery in the coming weeks:
Defensive investment
Being a low beta sector, utilities are relatively protected from significant fluctuations (ups and downs) in the stock market and are therefore considered a defensive investment or safe haven in times of economic or political turmoil (read: Beyond the “Big Six”: Why choose non-cyclical sector ETFs?).
The world’s largest economy is showing signs of slowing, increasing bets on defensive investments. The economy added 175,000 jobs last month, lower than expected, and the unemployment rate unexpectedly jumped to 3.9%. After expanding for 15 straight months, U.S. services sector activity also contracted unexpectedly in April. In another weak recent data, consumer confidence fell last month to the lowest since mid-2022. Additionally, the United States had a weak start to the year due to a decline in consumer and government spending amid rising inflation. The economy grew at its slowest in two years, with annual GDP rising 1.6% in the first quarter.
Fed Memo “No Rate Hike”
Being sensitive to interest rates, utility stocks benefited from the Fed’s message. The Fed has signaled that its fight against inflation will continue for a longer period, paving the way for a period of prolonged but no rate hikes. At its most recent meeting, the Fed kept interest rates at their highest level in 23 years, between 5.25% and 5.5%, citing a “lack of further progress” on inflation. Powell reiterated that it will now take longer than expected for the Fed to be convinced that inflation is falling sustainably to 2% (read: Fed Stays Put, Provides Nuanced Outlook: ETFs Likely to Win).
As utilities require enormous infrastructure, which creates a massive debt burden and interest obligations, the Fed’s “no rate hike” note has expanded the space.
Strong industry fundamentals
The sector continues to benefit from an ever-growing population, which increases demand for utilities such as water, gas and electricity. The growing adoption of artificial intelligence (AI) and electric vehicles will also boost electricity demand from utilities sector companies.
Focus on ETFs
Utilities Select SPDR sector (XLU – Free report)
With $12.8 billion in assets under management, Utilities Select Sector SPDR seeks to provide exposure to companies in the electric utility, water utility, multi-utility producer, independent power and renewable electricity, as well as the gas utility sectors. XLU tracks the Utilities Select Sector Index, holding 31 stocks in its basket. Electric utilities take the top spot among sectors at 65.6%, followed closely by multiple utilities (26.2%).
Utilities Select Sector SPDR charges 9 basis points in annual fees and sees heavy volume averaging 14.2 million shares. XLU is up 7.8% over the past month.
Vanguard Utilities ETF (Virtual virtual unit – Free report)
The Vanguard Utilities ETF tracks the MSCI US Investable Market Utilities 25/50 Index, holding 65 stocks in its basket, none of which represents more than 12% of the shares. More than half of the portfolio is allocated to electric utilities, closely followed by multi-utilities (25.4%).
Vanguard Utilities ETF charges 10 basis points in annual fees and sees good volume of around 173,000 shares on average. Its assets under management amount to $5.5 billion and are up 7.5% in one month.
iShares US Utilities ETF (UDI – Free report)
The iShares US Utilities ETF tracks the Russell 1000 Utilities RIC 22.5/45 Capped Index. He holds a basket of 46 stocks with a slight preference for the first company at 12%, while the others represent less than 7%. Again, electric utilities dominate the portfolio at 57%, followed by multiple utilities (22.3%).
The iShares US Utilities ETF has amassed $1 billion in its asset base while trading a healthy volume of 48,000 shares per day on average. The fund charges 40 basis points in annual fees and has gained 7% in one month (read: Utility ETFs (UDI – Free report) hits a new 52-week high).
Fidelity MSCI Utilities Index ETF (SMART – Free report)
The Fidelity MSCI Utilities Index ETF provides exposure to 70 utility stocks with $1.2 billion in assets under management. This is done by tracking the MSCI USA IMI Utilities Index. Here too, power utilities and multi-utilities are the two largest sectors with 62.2% and 25.2% share respectively.
The Fidelity MSCI Utilities Index ETF has an expense ratio of 0.08%, while average daily volume is good at 137,000 shares per day. It gained 7.6% in one month.
Invesco Dorsey Wright Utilities Momentum ETF (PUI – Free report)
The Invesco Dorsey Wright Utilities Momentum ETF provides exposure to 34 companies that exhibit relative strength (momentum) and tracks the Dorsey Wright Utilities Technical Leaders Index. Electric utilities and multi-utilities account for 46% and 26.6% of assets, respectively, while gas utilities round out the next spot with double-digit exposure.
The Invesco Dorsey Wright Utilities Momentum ETF charges 60 basis points in annual fees and sees light volume of around 2,000 shares on average. Its assets under management stand at $40 million and have gained 6% over the past month.
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