Why Yield-Hungry Investors Are Turning to Utility ETFs

July 15th at 2:00pm by Tom Lydon

The yield on 10-year Treasuries dropped back below 3% today, and when rates eventually rise, investors will start to loss some of their principal. This unappealing aspect of the markets has some investors looking at utility stocks and related exchange traded funds (ETFs) for higher yield returns.

Individual large utilities offer higher yields, but they are subject to individual equity risk, says iStockAnalyst. But, there are diversified utility ETFs that spread the risk and still provide 4% to 5% yields.

According to our ETF Analyzer, the three largest utilities ETFs are:

  • Utilities Select Sector SPDR (NYSEArca: XLU)
  • Vanguard Utilities (NYSEArca: VPU)
  • iShares Dow Jones U.S. Utilities Sector Index Fund (NYSEArca: IDU)

Sorting by yield in the Analyzer, each ETF has an appealing yield of 3.8%-3.9%. The top-yielding utility ETF right now is SPDR S&P International Utilities Sector (NYSEArca: IPU), which yields 9%.

Utility ETFs offer yields that are higher than conventional income asset classes, with the added benefit that their overall index volatility tends to be lower than that of the broader market. Additionally, this asset class has the potential for capital appreciation as more investors come into this area of the market. Over time, utilities usually incrementally increase their dividend payouts as their earnings grow. [The Appeal of Utility ETFs in Troubled Markets.]

Utilities have generally been perceived as a safe have for the risk-averse since utilities are a necessary aspect of everyday life, with the added benefit that the government backs it.

The Senate Energy and Natural Resources Committee chairman Sen. Jeff Bingaman (D-N.M.) is drafting a bill that would cap greenhouse gas emissions from the utility sector, reports Robin Bravender for The New York Times. White House chief of staff Rahm Emanuel has commented that President Barack Obama may back the legislation when he meets with a bipartisan group to further discuss the issue.

The utilities sector is divided on the new approach. Some believe the cap on just their sector will provide certainty while others don’t like the prospect of being the only sector stuck with regulation.

For more information on utilities, visit our utilities category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.