Utilities ETFs Can be a Market ‘Tell’
August 3rd 2012 at 8:00am by Tom Lydon
Investors should keep tabs on ETFs tracking the utilities sector because they can provide important clues on overall risk appetite in the market.
Utilities stocks are a traditionally defensive and stable sector that investors often favor when they’re seeking safe havens to ride out market storms.
When utilities ETFs are outperforming the market, it can mean investors are gun-shy. When they trail the market, investors are often in a risk-on mindset.
Utilities ETFs outperformed the S&P 500 in May but have been about neck-and-neck with the market the past two months.
After a glitch in computer algorithms pushed utilities exchange traded funds into volatile action Wednesday, utilities stocks were weaker along with the broader equities market Thursday.
SPDR Utilities Select Sector Fund ETF (NYSEArca: XLU) and Vanguard Utilities Sector ETF (NYSEArca: VPU) are among the largest ETFs indexed to the sector. [Algos Gone Wild: Utilities ETFs ‘Flash Smash’]
Both funds have gained almost 6% over the past three months as investors sought out safe, defensive plays with decent yields. XLU has a 3.68% 12-month yield and VPU has a 3.46% yield.
Utilities stocks are known for operating stable businesses with predictable dividend returns, qualities that investors like during rough market conditions. For instance, the sector outperformed the broader market in May when the Eurozone troubles first started up this year.
If the sector begins to underperform the overall market, it may be a positive sign for stocks since it would indicate that investors are beginning to move away from defensive plays and take on riskier assets.
On Wednesday, utilities sector ETFs were under the spotlight after jumping 5% on heavy volume in about 30 minutes of “unusual activity,” with VPU trading volume about 77 times the average.
Other utility ETF options include:
- iShares Dow Jones U.S. Utilities Index Fund ETF (NYSEArca: IDU): 3.21% yield.
- iShares S&P Global Utilities Sector Index Fund ETF (NYSEArca: JXI): 4.39% yield.
- First Trust Utilities AlphaDEX Fund ETF (NYSEArca: FXU): 2.53% yield.
- Guggenheim S&P Equal Weight Utilities ETF (NYSEArca: RYU): 3.24% yield.
For more information on the utilities sector, 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. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.