The Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities exchange traded fund, has not been a star performer to start 2016, but it has been a steadier play than many other sector ETFs. Utilities are a favored destination in rocky market environments, and knowing that, investors might want to consider global utilities ETFs.
The utilities sector fundamentals remain strong. However, utilities have been underforming due to the sector’s inverse relationship to rising interest rates – when rates rise or investors fear higher rates, utilities typically underpeform, and vice versa.
Most investors view utilities as a reliable, income-generating asset that exhibit some bondlike characteristics. As interest rates declined, the sector appealed to many income investors for its relatively higher yields.
Global and international options among utilities ETFs include the iShares Global Utilities ETF (NYSEArca: JXI) and the SPDR S&P International Utilities Sector ETF (NYSEArca: IPU). In recent years, not only have some developed markets utilities moved in near lockstep with their U.S. rivals, global utilities often sport higher dividend yields than their U.S. peers.
On Monday, J.P. Morgan Cazenove upgraded international utilities to overweight from underweight, noting “Utilities are trading at record discount to all the other Defensive sectors, at 0.4x relative P/B. Vs the overall market, we note that UK Utilities multiples appear somewhat stretched, but continental Utilities are trading near relative P/B lows. DY relative of the sector is very attractive, and more importantly our analysts believe they are mostly secure,” reports Chris Dieterich for Barron’s.
The iShares Global Utilities ETF, home to $153.2 million in assets under management, is a global ETF, meaning it can allocate some of its weight to U.S. stocks. In fact, the U.S. is the ETF’s largest country weight at 56% followed by the U.K. at just under 11%. The SPDR S&P International Utilities Sector ETF is a purely international ETF with not U.S. exposure. The U.K. and Japan combine for over 35% of that ETF’s weight.
In the U.S., as interest rates rise, yield investors will likely sell riskier dividend-yielding equities, like utilities, for more attractive fixed-income securities. Moreover, higher rates means utilities will face stiffer borrowing costs to fund growth, which would dampen earnings.
“Bond yields have recently rolled over. If the broader market volatility persists, yields could stay depressed. This might benefit Utilities. In any case, the ECB’s policy will remain much easier than the Fed’s, and the sector has predominantly domestic exposure, which we think is a positive,” according to the J.P. Morgan note posted by Barron’s.
iShares Global Utilities ETF
