Declining 10-year Treasury yields and the significant retrenchment in momentum stocks have been boons for the utilities sector this year.
The Utilities Select Sector SPDR (NYSEArca: XLU) is by far the best performer of the nine sector SPDR ETFs. Up 11.8% year-to-date, XLU is crushing the second-best of the SPDRs, the Health Care Select Sector SPDR (NYSEArca: XLV). The Vanguard Utilities ETF (NYSEArca: VPU) and the iShares U.S. Utilities ETF (NYSEArca: IDU) are also up more than 11%. [Utilities ETFs Assert Strength]
But it is more than just XLU and friends that are benefiting from the leadership of the utilities sector. Select dividend and low volatility ETFs are also getting a lift thanks to robust utilities sector exposure.
Take the example of the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV). Arguably in stealth fashion, the $3.8 billion SPLV hit an all-time high last Friday and is up about 3.7% year-to-date compared to a 2.1% gain for its biggest competitor, the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV). The difference maker is SPLV’s 24.5% weight to utilities stocks, more than triple that of USMV’s to the sector. [Low Vol ETFs Come Back Into Style]
That is not an affront to iShares because the sponsor offers two U.S.-focused dividend ETFs that have benefited from ample utilities exposure. Of the four largest dividend ETFs, the iShares Select Dividend ETF (NYSEArca: DVY) is easily the best performer this year with a 5% gain. That is proof positive that with Treasury yields ebbing, DVY’s 35.2% weight to the utilities sector is working in favor of investors.
It were large enough to be among the top-four dividend ETFs, the iShares High Dividend ETF (NYSEArca: HDV) would be second-best on a year-to-date basis with a 3.6% gain. HDV, though not small with $3.4 billion in assets, is not in the top four, but it does feature a 14.4% weight to utilities. HDV has attracted more than $108 million in new assets this year and has a trailing 12-month yield of 3.2%. [Income Investors Rush to This Dividend ETF]
Investors looking to access the utilities sector via a dividend ETF can also consider the First Trust Morningstar Dividend Leaders Index Fund (NYSEArca: FDL). FDL tracks the Morningstar Dividend Leaders Index, which emphasizes dividend consistency and dividend sustainability as part of its screening methodology.
FDL is up 4.9% this year, highlighting the ETF’s usefulness in sanguine rate environments. The ETF allocates over 48% of its combined weight to the rate-sensitive utilities and telecom sectors. Two utilities and two telecom stocks are found among FDL’s top-10 holdings. Rising rates do not mean FDL will generate negative returns. The ETF rose nearly 23% last year even as 10-year yields spike. FDL has a 12-month distribution yield of 3.1%. [Dial up This Dividend ETF]
The PowerShares S&P 500 High Dividend Portfolio (NYSEArca: SPHD) is another dividend ETF with ample utilities exposure. SPHD can be viewed has a high yield derivative of SPLV as the former is comprised of the 50 S&P 500 members with the highest yields and lowest volatility.
SPHD features a 26.1% weight to utilities stocks and a trailing 12-month yield of almost 3.4%. That utilities exposure is working in the ETF’s favor as SPHD is 5.4% this year. SPHD has six utilities stocks among its top-10 holdings and pays a monthly dividend.
PowerShares S&P 500 Low Volatility Portfolio
Tom Lydon’s clients own shares of DVY.