Exchange traded funds that invest in the utilities sector are trouncing the S&P 500 this year as investors assign a premium to defensive stocks and dividends.
Utilities Select Sector SPDR (NYSEArca: XLU) is up 12% year to date, compared with a 1% loss for the S&P 500, according to Morningstar.
“Why the dividend exists matters more than any other single factor. I think that is why utilities have been such a great sector this year,” Nicholas Colas, ConvergEx Group Chief Market Strategist, said. “Those equities represent some of the best bond substitute available to most investors, since they provide an essential service and their business models therefore have very little risk.” [Dividend ETFs See Performance Diverge on Sector Allocations]
The utilities ETF has a dividend yield of about 4%, according to manager State Street Global Advisors. The fund allocation is 53.5% in electric utilities, 29% on multi-utilities, 4.8% in independent power producers and energy traders, and 2.4% in gas utilities. [ETF Flows Suggest Defensive Sector Rotation]
Other ETF options for the sector include Vanguard Utility Sector ETF (NYSEArca: VPU) and iShares Dow Jones U.S. Utilities Index (NYSEArca: IDU).
Utilities ETFs were also outperforming on Wednesday.
“A clue that equities may soon drop back is today’s performance of the most defensive industry. SPDR Utilities is outperforming, up 1% at the time of writing, whereas the S&P 500 is flat,” said Tarquin Coe, technical analyst at Investors Intelligence. “The ratio of the S&P 500 versus the XLU is attempting to reassert its nine month uptrend, a trend which is more oversold than overbought. That rising chart reflects a defensive rotation. The defensive rotation evident today is another bearish clue.”
Tisha Guerrero contributed to this article.