Stodgy and defensive utilities exchange traded funds may have been uninspiring so far this year, but the sector shined in the third quarter as volatility dragged on riskier segments of the market.
Over the past three months, Utilities Select Sector SPDR (NYSEArca: XLU) rose 3.6%, Vanguard Utilities ETF (NYSEArca: VPU) gained 2.9% and iShares U.S. Utilities ETF (NYSEArca: IDU) increased 3.3%. In contrast, the SPDR S&P 500 ETF (NYSEArca: SPY) fell 5.4%. The utilities sector ETFs also moved back above their 200-day simple moving average on Monday.
“As global economic concerns increased, we think investors found the domestic focused, stable dividend, and earnings provided by the sector appealing,” writes Todd Rosenbluth, Director of ETF Research at S&P Capital IQ, in a research note.
While volatility spiked in global markets, investors may have found solace in U.S. utilities, which have a small global footprint. Moreover, with the Federal Reserve pushing off on an interest rate hike, dividend-yielding utilities also attracted income-minded investors.
XLU has a 3.61% 12-month yield. VPU has a 3.61% 12-month yield. IDU has a 3.49% 12-month yield. In contrast, yields on benchmark 10-year Treasuries fell to as low as 1.91% over the third quarter.
“Since earnings growth may be constrained compared with sectors that introduce new products, such as health care or information technology, utilities tend to offer investors a higher dividend due to their relatively steady cash flows, and as an incentive to buy utilities shares,” Rosenbluth added.
Looking at the utilities profit outlook, Capital IQ estimates that the sector could post earnings growth of 0.9% for the third quarter and 1.7% for all of 2015.
In contrast, the S&P 500 is expected to see earnings decline of 4.5% for Q3, which was downwardly revised since the start of the third quarter, according to FactSet data, as energy and multinational sectors weighed on the broader index.
Over the long-term, the utilities sector could continue to generate steady profits as the industry expands operations. According to S&P Capital IQ Equity Analyst Christopher Muir, the utilities industry is experiencing high levels of capital spending on regulated capital spending through infrastructure replacement, new transmission and distribution facilities, and regulated power plants. Additionally, unregulated spending will focus on natural gas-fired combined-cycle power plants and investments in solar and wind.
Utilities Select Sector SPDR
For more information on the utilities sector, visit our utilities category.
Full disclosure: Tom Lydon’s clients own shares of XLU.
Max Chen contributed to this article.