As the markets turn and investors grow more conservative, defensive assets like utilities sector exchange traded funds (ETFs) are back in the limelight.
While the equities market has fallen off over the past few days, with the S&P 500 on track for a three-week low, the utilities sector is strengthening as a defensive play.
The less exciting utilities sector is known for its reliability and income generation. Additionally, the area may also be seen as a tactical bet on low interest rates and long-term growth in electricity demand.
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With the Federal Reserve pushing off on interest rate hikes and only targeting two rate increases this year, government bond yields remain depressed this year, which has helped support alternative yield-generating assets like utilities. Yields on benchmark 10-year Treasuries also dipped to 1.79% Wednesday, sending utilities up 1.1% for the day.
However, if interest rates do spike, the bond-esque utilities sector may suffer as investors would look toward safer government debt with higher yields.
[related_stories]“Long viewed as bond substitutes, utilities tend to generate stable cash flows and attractive yields,” writes Morningstar analyst Robert Goldsborough. “There is a long-standing relationship between interest rates and utilities’ performance relative to the rest of the market. When rates rise or investors fear higher rates, utilities tend to underperform. During a low-rate environment or when rates are falling, utilities tend to outperform.”
Investors interested in tracking the utilities space have a number of ETF options available.
Utilities ETFs:
- Utilities Select Sector SPDR (NYSEArca: XLU)
- Vanguard Utilities ETF (NYSEArca: VPU)
- First Trust Utilities AlphaDEX Fund (NYSEArca: FXU)
- iShares U.S. Utilities ETF (NYSEArca: IDU)
- Fidelity MSCI Utilities Index ETF (NYSEArca: FUTY)
- Guggenheim S&P Equal Weight Utilities ETF (NYSEArca: RYU)
- PowerShares DWA Utilities Momentum Portfolio (NYSEArca: PUI)
- iShares Global Utilities ETF (NYSEArca: JXI)
- PowerShares S&P Small Cap Utilities Portfolio (NasdaqGM: PSCU)
- SPDR S&P International Utilities Sector ETF (NYSEArca: IPU)
- WisdomTree Global ex-US Utilities Fund (NYSEArca: DBU)
- John Hancock Multifactor Utilities ETF (NYSEArca: JHMU)
- Reaves Utilities ETF (NasdaqGM: UTES)
Leveraged/inverse ETFs:
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