Utilities sector exchange traded funds provide stability, along with some extra cash, in times of market duress when high-flying-beta stocks experience wild swings.
The utilities sector has been outperforming the broader equities market so far this year. Year-to-date, the Utilities Select Sector SPDR (NYSEArca: XLU) is up 10.6%, Vanguard Utilities ETF (NYSEArca: VPU) is 9.9% higher and iShares U.S. Utilities ETF (NYSEArca: IDU) rose 9.9%.
Given the increased geopolitical uncertainty in eastern Europe and the Middle East, utility stocks’ steady influence on a portfolio could provide investors with a source of stability, writes John Prestbo for MarketWatch.
Specifically, Prestbo points out that XLU showed a 32.8% correlation to the S&P 500 so far this year, while VPU showed a 37.6% correlation and IDU had a 35.3% correlation.
XLU is the largest sector-focused ETF, with $6.1 billion in assets under management, but it is less diversified with 32 stock holdings. In comparison, the $1.8 billion VPU has 79 components and the $1.1 billion IDU tracks 63 stocks.
The Vanguard offering is the cheapest of the group, with a 0.14% expense ratio. In comparison, XLU has a 0.16% expense ratio and IDU has a 0.46% expense ratio.
Additionally, investors will also enjoy decent yields as well. For instance, XLU has a 3.57% 12-month yield, VPU has a 3.44% 12-month yield and IDU has a 3.13% 12-month yield.
However, the sector is susceptible to interest rate risk. The falling interest rate has helped utilities stocks outperform other equity sectors, but the trend could reverse once the Federal Reserve hikes rates.
“If rates rise, our analysts expect flat returns for utilities and underperformance relative to other U.S. equity sectors,” according to Morningstar analyst Robert Goldsborough.
Utilities Select Sector SPDR
For more information on dividend stocks, visit our dividend ETFs category.
Max Chen contributed to this article.