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]
ETFs continue to be a premiere method for investors to gain access to the sector, with minimal volatility. The dividend yield will be an added plus, as these will continue to go up should share prices inch down. Investors who are interested in the sector should mind the current interest rate, and any subsequent moves due to the nature of these companies.
Utilities Select Sector SPDR Fund
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.