With the utilities sector likely to end 2014 as the S&P 500’s top performing sector, it has been impossible for investors to go wrong with utilities exchange traded funds.
A quick glance at both marquee and unheralded utilities ETFs turns up a group of funds that in nearly all instances have outperformed the S&P 500 by at least two-to-one margins. However, it is a tried and true friend that leads all utilities ETFs this year: The Utilities Select Sector SPDR (NYSEArca: XLU).
XLU, the largest utilities ETF, has surged 29.3% this year and hit an all-time high on Monday. That 2014 gain for XLU is more than double the 13.2% returned by the S&P 500. More than any other sector, rate-sensitive utilities have benefited from this year’s tumble in 10-year Treasury yields. Dominion Resources (NYSE: D), Duke Energy (NYSE: DUK), NextEra Energy (NYSE: NEE) and Southern Co. (NYSE: SO), a combined 32%of XLU’s weight, hit all-time highs last Friday.
“A pullback in interest rates has been a nice benefit for the highest-yielding and most-defensive utilities,” according to Morningstar analyst Robert Goldsborough. “Our analysts also believe that if Treasury rates stabilize closer to 3%, utilities actually could outperform the market.” [Utilities Breaking Out Against S&P 500]
Investors have embraced utilities ETFs, which is not surprising considering XLU’s 3.14% dividend yield. That is 93 basis points above where 10-year yields currently reside. XLU has added $1.51 billion in new assets this year. However, that is merely good enough for the fourth-best inflows among the nine sector SPDR ETFs.
The utilities sector has traditionally acted as a safe-haven play in the equities space. The companies provide stable and steady returns, along with regular dividend payments. In fact, many of this year’s top performing dividend ETFs are funds with large utilities sector allocations. [Dividend ETF Comes of Age]