Already this year’s top-performing sector in the S&P 500, the utilities group continues to gain strength.
Utility ETFs were the best performing sector Thursday, with the Utilities Select Sector SPDR (NYSEArca: XLU), iShares U.S. Utilities ETF (NYSEArca: IDU) and Vanguard Utilities ETF (NYSEArca: VPU) all up around 0.7%.
The sector has also been one of the best performing areas this year. XLU is up 16.2% year-to-date, IDU is 15.7% higher and VPU gained 15.5%. The S&P 500 Utilities Sector Index has increased 14.1% so far this year, compared to the broader S&P 500 index gains of 6.9%. [Low-Volatility ETFs: Slow and Steady Winning the Race]
On Wednesday, Federal Reserve Chair Janet Yellen pointed to improving U.S. markets and modest inflation and promised to keep short-term rates low until next year.
Given the Fed’s continued stance on low rates, dividend paying utility stocks were strengthening again on Thursday.
“Prior to 2000, utilities’ reputation among investors was one of reliability and income generation, and not necessarily price appreciation,” according to Morningstar analyst Robert Goldsborough. “However, since that time, the long decline in interest rates arguably broadened utilities companies’ investor base.”
Now that interest rates will remain low, at least for the time being, utility sector stocks remain an attractive option for yields. XLU has a 3.44% 12-month yield, IDU has a 3.01% 12-month yield and VPU has a 3.37% 12-month yield. [Utilities ETFs for Defense]
However, investors should be aware that utilities could experience flat returns or underperform other equity sectors over the long term as interest rates rise.
“Higher rates generally make fixed-income instruments more attractive on a relative basis and make bond-like equities, such as utilities companies, less attractive,” Goldsborough added.
tilities Select Sector SPDR
For more information on the utilities sector, visit our utilities category.
Max Chen contributed to this article.