Conservative investors have embraced utilities stocks and ETFs in a big way over the past several years. The Federal Reserve’s near-zero interest rate and easy money policies have been major catalysts that have driven investors to the stodgy utilities sector.
Low interest have depressed yields on money markets and U.S. government bonds, making the yields on utilities stocks all the more appealing. For example, the Utilities Select Sector SPDR (NYSEArca: XLU) currently yields just under 4%. Additionally, low borrowing costs have enabled utilities to service debt at favorable rates while providing income investors with a steadily rising payouts. [A Utilities ETF for an Attractive Yield and Defense]
That favorable environment is turning for the worse as yields on 10-year U.S. Treasuries have jumped 13% in the past month, a move that has taken XLU down 4.5%. Higher interest rates have stoked speculation that rate-sensitive, income-generating asset classes such as MLPs, REITs, and yes, utilities will be stung be higher borrowing costs. [Rising Rates Hit Utilities ETFs in Q2]
As has been the case with global REIT funds, utilities ETFs with an international flair have been noticeably less sensitive to fluctuations in U.S. rates than their U.S.-focused rivals. Take a look at the WisdomTree Global ex-US Utilities Fund (NYSEArca: DBU).
DBU may be a small ETF with just $36.7 million in assets under management, but the fund has lost just 0.6% in the past four weeks. DBU offers exposure to 25 countries, but it is the top seven country weights that really dominate the fund. That group includes Brazil at a weight of 11%, making Latin America’s largest economy DBU’s largest country weight.
The Brazil exposure presents some risks. As we noted in June, Brazilian utilities stocks have been under pressure since September 2012 when, in a bid to stem inflation, the Brazilian government forced utility companies to abandon free pricing, a move that amounted to the government telling utilities “No more price increases, thank you very much.” [Foreign Utilities ETF Less Bad…Sort Of]
DBU also offers some exposure to an improving economy across the Atlantic as five European nations are found among the ETF’s top-10 country weights. All told, Eurozone nations account for nearly a third of DBU’s weight and that does not include the fund’s exposure to the U.K. or Emerging Europe.
DBU’s index, the WisdomTree Global ex-US Utilities Index, has annualized volatility of just 15% since inception just over two years ago. That is higher than what investors are accustomed to with U.S. utilities ETFs. Still, DBU compensates for the risk with an important element to its index construction: DBU components are weighted by yield, not market cap. The result is a 30-day SEC of 5.05%, more than 100 basis points higher than XLU’s.
WisdomTree Global ex-US Utilities Fund
ETF Trends editorial team contributed to this post.