The utilities sector is sensitive to interest rates, so the move higher in Treasury yields has triggered volatility in related ETFs. However, utilities ETFs may still hold appeal for investors looking for dividends and some safety in a market pullback.
“With the recent decline in the shares of both electric utility stocks and ETFs, the yield from their dividends has increased, thus making them more attractive for the potential total return they might provide,” S&P Capital wrote in a recent note. [Dividend ETFs Under Pressure as Interest Rates Rise]
Utilities Select Sector SPDR Fund (NYSEArca: XLU) and Vanguard Utilities Index Fund (NYSEArca: VPU) are both currently rated “Marketweight” by the ratings company. XLU has returned 7.5% year-to-date and VPU has given back 3.5%. VPU features a 3.6% yield, and XLU has a dividend yield of 3.8%. [Interest Rates Hit Utility Sector ETFs in Q2]
The electric utility industry faces headwinds as the Obama Climate Action Plan, announced in late June, targets coal-fired power plants and limits the amount of carbon pollution emissions that each plant can produce. This will enable the Department of the Interior to create enough renewable projects on public lands and power more than 6 million homes by 2020.
For now, the total impact for the electric utility sector is unknown, as legal changes will be likely and guidelines for regulations need to proposed. [Going Green Could Dim Utility ETF Sector Outlook]