It has traded lower over the past month, but with the decline in Treasury yields, the Utilities Select Sector SPDR (NYSEArca: XLU) has been less bad than some other well-known sector ETFs and with investors looking for less volatile destinations, utilities stocks and exchange traded funds see increased interest in the near-term.
Investors considering the utilities sector should also evaluate the Guggenheim S&P Equal Weight Utilities ETF (NYSEArca: RYU), the equal-weight equivalent of XLU. Unlike XLU, RYU includes a small allocation toward telecommunication services and follows an equal-weight methodology, writes Miriam Cross for Kiplinger.
However, before jumping into any utilities ETF, investors need to be mindful of the sector’s sensitivity to rising interest rates, meaning it is pivotal to keep on high on Treasury for clues regarding the Federal Reserve’s next move. [Utilities ETFs for Bargain Shoppers]
“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.”
By equally weighting the underlying holdings, RYU leans toward mid-cap names. On the other hand, XLU, which tracks the S&P 500 utilities sector, only focuses on utilities companies, including electric utilities, multi-utilities, independent power producers & energy traders, and gas utilities.
The recent outperformance of the utilities sector has also been a result of a combination of increased heating demand due to an abnormally frigid winter and falling yields in benchmark 10-year Treasuries. [Yield-Generating Utilities ETFs Shine in a Murky Market]
RYU, which has performed inline with XLU year-to-date but has outperformed the cap-weighted fund over the past month, has other perks as well, including a decent yield and reduced beta.
“The fund provides a reasonable yield in today’s low yield environment, low volatility with a beta of 0.87 and reasonable liquidity. Should the global economy contract because of a readjustment in the Chinese economy, and the U.S. economy remains reasonably strong with depressed commodity prices, a utility fund such as the Guggenheim S&P 500 Equal Weight Utilities ETF would do well generating good returns with relative safety for some time to come,” according to a post on Seeking Alpha.
Guggenheim S&P Equal Weight Utilities ETF
