Utilities sector exchange traded funds jumped Tuesday, trading back above its short-term trend line, as a major player raised dividends and the risk-off environment pushed investors back into conservative, yield-generating assets.
On Tuesday, the Utilities Select Sector SPDR (NYSEArca: XLU) rose 2.6%, Vanguard Utilities ETF (NYSEArca: VPU) gained 2.5% and iShares U.S. Utilities ETF (NYSEArca: IDU) increased 2.6%, breaking above their 50-day simple moving averages. [Utilities ETFs for Bargain Shoppers]
Utility stocks were rising as investors turned to the more attractive yield-generating assets in response to the falling yield in benchmark 10-year Treasuries.
The 10-year Treasury note yields dipped to 2.23% Tuesday, falling about 24 basis points since the end of June, after Greece passed over a debt deadline and continued uncertainty pushed investors back into safe-haven assets.
Meanwhile, the traditionally defensive utilities sector, with its higher yields, is attracting greater attention. For instance, XLU has a 3.72% 12-month yield, VPU has a 3.65% 12-month yield and IDU has a 3.6% 12-month yield.
Additionally, further supporting utilities sector gains, Duke Energy Corp. (NYSE: DUK), the largest component in utilities-related ETFs, raised its quarterly dividend by 4% on Tuesday, reports Chris Lange for 24/7 Wall St.
DUK makes up 9.0% of XLU, 7.7% of VPU and 8.0% of IDU.
“For the past 89 consecutive years, the dividend payment has been an important part of our commitment to deliver attractive total returns to shareholders,” Lynn Good, president and CEO of Duke, said. “The strength of our cash flows and balance sheet provides valuable financial flexibility to continue growing the dividend.”
Duke’s dividend plans reveal a potentially strong move in the sector, despite the underperformance in utilities so far this year and the greater chance for a Federal Reserve interest rate hike ahead.
“Longer-term, in a rising-rate environment, we would expect flat returns at best for utilities companies and underperformance when compared with other equity sectors,” according to Morningstar analyst Robert Goldsborough. “Higher rates generally make fixed-income instruments more attractive on a relative basis and make bondlike equities, such as utilities companies, less attractive.”
Utilities Select Sector SPDR
For more information on the utilities sector, visit our utilities category.
Max Chen contributed to this article.