Well-known are the recent woes of domestic utilities stocks and the major ETFs that offer access to the normally boring sector. Utilities have been decimated by concerns that U.S. interest rates are going to rise, a scenario that brings about two elements of bad news for utilities
First, higher interest rates means higher borrowing costs, a significant disadvantage for capital-intensive industries such as utilities. Second, surging yields on U.S. Treasuries could make those bonds more attractive to conservative investors than even staid utilities shares. The result is the Utilities Select Sector SPDR (NYSEArca: XLU) is down 5.4% in the past month while the rival Vanguard Utilities ETF (NYSEArca: VPU) has slumped 5.1%. [Rates Dim Utility ETFs]
And then there is the potential for a cyclical rotation. The classic characteristics of the utilities sector such as steady dividends, low-volatility and performance in down markets has worked against this area of the market lately. Investors are turning to riskier stocks and assets classes now, despite the recent rise in interest rates [Utilities ETFs Down as Interest Rates Rise]
By stripping U.S. utilities out of the equation, investors have done a little bit better. Emphasis on “little bit.” The WisdomTree Global ex-US Utilities Fund (NYSEArca: DBU) is down just 3.2% in the past month, but that out-performance of ETFs such as XLU and VPU is not guaranteed to continue and DBU’s country weights underscore that assertion.
DBU offers exposure to 26 countries, but it is the top seven country weights that really dominate the fund. That group includes Brazil at a weight of 8.6%, making Latin America’s largest economy DBU’s third-largest country weight.
Brazilian utilities stocks have been under pressure since September when, in a bid to stem inflation, the Brazilian government forced utility companies to abandon free pricing and reduce electricity prices for industrial and residential consumers, Vanessa Iriarte writes for Glass Lewis & Co.
Even if things were fine with Brazilian stocks, DBU would present some cause for concern because Italy and Japan combine for almost 20% of the fund’s weight. That implies a level of risk that most utilities investors may not be comfortable taking in the current environment.
DBU’s yield is another cause for concern. Although many individual global utilities names have higher yields than their U.S. counterparts, DBU’s 30-day SEC yield is just 2.5% compared to 3.86% on XLU.
WisdomTree Global ex-US Utilities Fund
ETF Trends editorial team contributed to this piece.