As the equities markets weaken, investors should utilize utilities sector exchange traded funds to cushion dips in the broader stocks.
For instance, the Utilities Select Sector SPDR (NYSEArca: XLU) was up 0.7% Monday as the S&P 500 Index dipped 0.3%. Year-to-date, XLU has increased 12.8% while the S&P 500 gained 8.9%. [Investors Go On The Defensive With Utilities ETFs]
During a risk-off environment, the stock market will experience greater swings, and investors can hedge against the oscillations by shifting into defensive utilities, writes Richard Suttmeier for TheStreet.
Additionally, utilities investors will also benefit from added dividend cushion. XLU has a trailing 12-month yield of 3.41%. [3 Yield-Generating, Utilities ETFs for Volatile Times]
“Utilities companies’ fundamentals have remained strong,” according to Morningstar analyst Robert Goldsborough. “Most utilities have strengthened their earnings profiles and balance sheets by taking advantage of low-cost borrowing and rich market prices. We see no wholesale threats to dividends across the sector.”
Weighing down the broad U.S. market outlook, small-caps have formed a so-called death cross where the short-term trendline has dipped below its long-term trend – a bearish technical action. Additionally, observers are concerned that the strong U.S. dollar could depress large mulch-national company revenue from foreign sales. Additionally, the oil market is pointing to slower economic growth as prices decline in response to low demand.
Looking ahead, if the U.S. experiences another harsh winter, utilities companies, notably gas utilities, could power up again. The utility sector usually experiences a very temporary but favorable seasonal trend.