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In the latest rally fueled by renewed hopes of rate cuts, the utility sector has been outperforming. The ultra-popular Utilities Select Sector SPDR (XLU - Free Report) has risen in double digits since Apr 16 compared with 2.3% gains for the S&P 500 Index.
This is especially true as the sector, which tends to outperform when the economy is in a downturn, is making the most of the current volatility and uncertainty triggered by the timing of the Fed rate cuts, slowing economy and geopolitical tension. No wonder most utility stocks and ETFs are hitting fresh highs.
Utilities Select Sector SPDR (XLU - Free Report) , Vanguard Utilities ETF (VPU - Free Report) , iShares U.S. Utilities ETF (IDU - Free Report) , Fidelity MSCI Utilities Index ETF (FUTY - Free Report) and Invesco Dorsey Wright Utilities Momentum ETF (PUI - Free Report) are the popular funds that are hitting a series of new one-year highs in the recent trading sessions. These products carry a Zacks ETF Rank #3 (Hold) (see: all the Utilities ETFs here).
Here, we discuss some strong reasons for the outperformance of the sector and ETFs. 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 (read: Beyond "Big Six:" Why Choose Non-Cyclical Sector ETFs?).
The world's largest economy is showing signs of a slowdown, thus raising bets for defensive investments. The economy added a lower-than-expected 175,000 jobs last month, and the unemployment rate unexpectedly jumped to 3.9%. After growing for 15 consecutive months, U.S. service sector activity also unexpectedly contracted in April. In another recent weak data, consumer confidence dropped last month to the lowest since mid-2022. Additionally, the United States had a weak start to the year due to lower consumer and government spending amid growing inflation. The economy expanded at the slowest pace in two years, with GDP rising 1.6% annually in the first quarter.
Fed “No Rate Hike” Memo
Being interest rate-sensitive, utility stocks got a boost from the Fed’s message. The Fed signaled that its fight against inflation will continue for a longer period, setting the stage for a period of extended higher rates but no rate hikes. In its latest meeting, the Fed kept interest rates steady at a 23-year high in the range of 5.25% to 5.5%, citing a “lack of further progress” on inflation. Powell reiterated that it will now take longer than expected for the Fed to reach the confidence that inflation is moving sustainably down to 2% (read: Fed Stays Put, Provides Nuanced Outlook: ETFs Likely to Win).
As utilities require huge infrastructure, which creates a massive debt burden and interest obligation, the Fed’s “no rate hike” memo lifted the space.
Solid Industry Fundamentals
The sector continues to benefit from an ever-increasing population, which is pushing up demand for utility supplies like water, gas and electricity. The increased adoption of artificial intelligence (AI) and electric vehicles will also boost electricity demand for companies within the utilities sector.
With an AUM of $12.8 billion, Utilities Select Sector SPDR seeks to provide exposure to companies from the electric utility, water utility, multi-utility, independent power and renewable electricity producers, and gas utility industries. XLU follows the Utilities Select Sector Index, holding 31 stocks in its basket. Electric utilities take the top spot among sectors at 65.6%, closely followed by multi utilities (26.2%).
Utilities Select Sector SPDR charges 9 bps of annual fees and sees a heavy volume of 14.2 million shares, on average. XLU has rallied 7.8% over the past month.
Vanguard Utilities ETF follows the MSCI US Investable Market Utilities 25/50 Index, holding 65 securities in its basket, with none accounting for more than 12% share. More than half of the portfolio is allocated to electric utilities, closely followed by multi utilities (25.4%).
Vanguard Utilities ETF charges 10 bps in annual fees and sees a good volume of around 173,000 shares on average. It has AUM of $5.5 billion and is up 7.5% in a month.
iShares U.S. Utilities ETF tracks the Russell 1000 Utilities RIC 22.5/45 Capped Index. It holds a basket of 46 securities with a slight tilt toward the top firm at 12%, while others make up for less than 7%. Here again, electric utilities dominate the portfolio at 57%, followed by multi utilities (22.3%).
iShares U.S. Utilities ETF has amassed $1 billion in its asset base while trading in a good volume of 48,000 shares a day on average. The fund charges 40 bps in annual fees and has gained 7% in a month (read: Utilities ETF (IDU - Free Report) Hits New 52-Week High).
Fidelity MSCI Utilities Index ETF provides exposure to 70 utility stocks with AUM of $1.2 billion. This is done by tracking the MSCI USA IMI Utilities Index. Here too, electric utilities and multi utilities are the top two sectors with 62.2% and 25.2% share, respectively.
Fidelity MSCI Utilities Index ETF has an expense ratio of 0.08%, while the average daily volume is good at 137,000 shares a day. It has gained 7.6% in a month.
Invesco Dorsey Wright Utilities Momentum ETF offers exposure to 34 companies that are showing relative strength (momentum) and tracks the Dorsey Wright Utilities Technical Leaders Index. Electric utilities and multi utilities account for 46% and 26.6% of the assets, respectively, while gas utilities round off the next spot with double-digit exposure.
Invesco Dorsey Wright Utilities Momentum ETF charges 60 bps in annual fees and sees a light volume of around 2,000 shares on average. It has AUM of $40 million and has gained 6% over the past month.
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Here's Why Utility ETFs Are Scaling New Highs
In the latest rally fueled by renewed hopes of rate cuts, the utility sector has been outperforming. The ultra-popular Utilities Select Sector SPDR (XLU - Free Report) has risen in double digits since Apr 16 compared with 2.3% gains for the S&P 500 Index.
This is especially true as the sector, which tends to outperform when the economy is in a downturn, is making the most of the current volatility and uncertainty triggered by the timing of the Fed rate cuts, slowing economy and geopolitical tension. No wonder most utility stocks and ETFs are hitting fresh highs.
Utilities Select Sector SPDR (XLU - Free Report) , Vanguard Utilities ETF (VPU - Free Report) , iShares U.S. Utilities ETF (IDU - Free Report) , Fidelity MSCI Utilities Index ETF (FUTY - Free Report) and Invesco Dorsey Wright Utilities Momentum ETF (PUI - Free Report) are the popular funds that are hitting a series of new one-year highs in the recent trading sessions. These products carry a Zacks ETF Rank #3 (Hold) (see: all the Utilities ETFs here).
Here, we discuss some strong reasons for the outperformance of the sector and ETFs. 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 (read: Beyond "Big Six:" Why Choose Non-Cyclical Sector ETFs?).
The world's largest economy is showing signs of a slowdown, thus raising bets for defensive investments. The economy added a lower-than-expected 175,000 jobs last month, and the unemployment rate unexpectedly jumped to 3.9%. After growing for 15 consecutive months, U.S. service sector activity also unexpectedly contracted in April. In another recent weak data, consumer confidence dropped last month to the lowest since mid-2022. Additionally, the United States had a weak start to the year due to lower consumer and government spending amid growing inflation. The economy expanded at the slowest pace in two years, with GDP rising 1.6% annually in the first quarter.
Fed “No Rate Hike” Memo
Being interest rate-sensitive, utility stocks got a boost from the Fed’s message. The Fed signaled that its fight against inflation will continue for a longer period, setting the stage for a period of extended higher rates but no rate hikes. In its latest meeting, the Fed kept interest rates steady at a 23-year high in the range of 5.25% to 5.5%, citing a “lack of further progress” on inflation. Powell reiterated that it will now take longer than expected for the Fed to reach the confidence that inflation is moving sustainably down to 2% (read: Fed Stays Put, Provides Nuanced Outlook: ETFs Likely to Win).
As utilities require huge infrastructure, which creates a massive debt burden and interest obligation, the Fed’s “no rate hike” memo lifted the space.
Solid Industry Fundamentals
The sector continues to benefit from an ever-increasing population, which is pushing up demand for utility supplies like water, gas and electricity. The increased adoption of artificial intelligence (AI) and electric vehicles will also boost electricity demand for companies within the utilities sector.
ETFs in Focus
Utilities Select Sector SPDR (XLU - Free Report)
With an AUM of $12.8 billion, Utilities Select Sector SPDR seeks to provide exposure to companies from the electric utility, water utility, multi-utility, independent power and renewable electricity producers, and gas utility industries. XLU follows the Utilities Select Sector Index, holding 31 stocks in its basket. Electric utilities take the top spot among sectors at 65.6%, closely followed by multi utilities (26.2%).
Utilities Select Sector SPDR charges 9 bps of annual fees and sees a heavy volume of 14.2 million shares, on average. XLU has rallied 7.8% over the past month.
Vanguard Utilities ETF (VPU - Free Report)
Vanguard Utilities ETF follows the MSCI US Investable Market Utilities 25/50 Index, holding 65 securities in its basket, with none accounting for more than 12% share. More than half of the portfolio is allocated to electric utilities, closely followed by multi utilities (25.4%).
Vanguard Utilities ETF charges 10 bps in annual fees and sees a good volume of around 173,000 shares on average. It has AUM of $5.5 billion and is up 7.5% in a month.
iShares U.S. Utilities ETF (IDU - Free Report)
iShares U.S. Utilities ETF tracks the Russell 1000 Utilities RIC 22.5/45 Capped Index. It holds a basket of 46 securities with a slight tilt toward the top firm at 12%, while others make up for less than 7%. Here again, electric utilities dominate the portfolio at 57%, followed by multi utilities (22.3%).
iShares U.S. Utilities ETF has amassed $1 billion in its asset base while trading in a good volume of 48,000 shares a day on average. The fund charges 40 bps in annual fees and has gained 7% in a month (read: Utilities ETF (IDU - Free Report) Hits New 52-Week High).
Fidelity MSCI Utilities Index ETF (FUTY - Free Report)
Fidelity MSCI Utilities Index ETF provides exposure to 70 utility stocks with AUM of $1.2 billion. This is done by tracking the MSCI USA IMI Utilities Index. Here too, electric utilities and multi utilities are the top two sectors with 62.2% and 25.2% share, respectively.
Fidelity MSCI Utilities Index ETF has an expense ratio of 0.08%, while the average daily volume is good at 137,000 shares a day. It has gained 7.6% in a month.
Invesco Dorsey Wright Utilities Momentum ETF (PUI - Free Report)
Invesco Dorsey Wright Utilities Momentum ETF offers exposure to 34 companies that are showing relative strength (momentum) and tracks the Dorsey Wright Utilities Technical Leaders Index. Electric utilities and multi utilities account for 46% and 26.6% of the assets, respectively, while gas utilities round off the next spot with double-digit exposure.
Invesco Dorsey Wright Utilities Momentum ETF charges 60 bps in annual fees and sees a light volume of around 2,000 shares on average. It has AUM of $40 million and has gained 6% over the past month.