ETF Trends
ETF Trends

Shaking off disappointing earnings results on Wall Street, utilities sector stocks and related exchange traded funds were outpacing the broader markets Tuesday and may continue to strengthen on strong fundamentals.

The Utilities Select Sector SPDR (NYSEArca: XLU) was up 0.6% Tuesday while the S&P 500 index dipped 0.9%. Over the past year, XLU has increased 33.9%, compared to the 17.1% rise in the SPDR S&P 500 ETF (NYSEArca: SPY).

Merrill Lynch analysts argue that many supporting fundamentals should allow investors to maintain a position in the utilities sector after an impressive run over the past few years, reports Lee Jackson for 24/7 Wall St.

The analysts have placed a buy rating on a myriad of high-yielding utilities stocks, such as the AES Corp. (NYSE: AES), which owns electricity to a broad range of customers, including government, residential, commercial and industrial users, as well as the wholesale market. Additionally, the company has operations in many overseas regions. AES makes up 1.4% of XLU.

Dominion Resources (NYSE: D) has a steady history of raising dividends, with the company expected to raise dividends 7% this year. Moreover, observers believe that new EPA rules may provide a tailwind for the energy producer. D makes up 7.5% of XLU.

Edison International (NYSE: EIX) tops the Merrill Lynch list of utility stocks. The company recently raised its quarterly dividend to shareholders by 17.6%, providing strong confidence in its cash flow. EIX is 3.6% of XLU.

Additionally, PPL Corp (NYSE: PPL) is among the leading utilities companies that plans on improving regulated operations and lower earnings volatility associated with competitive operations. The company is also diversified away from the U.S. with U.K. exposure. PPL is 3.9% of XLU.

Utilities stocks have also been gaining traction among yield-hungry investors, especially with benchmark 10-year Treasury bonds now yielding about 1.82%. XLU has a 3.19% 12-month yield.

Moreover, cheaper fuel prices, with natural gas futures trading shy of $3 per million British thermal units, have also cut input costs for many electricity producers. If winter conditions persist, utilities could also continue to outperform as consumers try to keep warm. [U.S. Energy Boom Energizes Utilities ETFs]

Utilities Select Sector SPDR

For more information on the utilities sector, visit our utilities category.

Max Chen 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.