As U.S. equities experienced swings over recent weeks, utilities stocks and utility ETFs have outperformed.
Over the past month, the Utilities Select Sector SPDR (NYSEArca: XLU) rose 2.2%, Vanguard Utilities ETF (NYSEArca: VPU) gained 2.3% and First Trust Utilities AlphaDEX Fund (NYSEArca: FXU) increased 2.5% and Reaves Utilities ETF (NYSEArca: UTES) added 2.0%. In contrast, the S&P 500 dipped 2.1%.
In the equities space, utilities have traditionally acted as a safe sector bet and have been seen as a reliable source of income.
“Investors looking for income should take another look at utilities,” Jay Rhame, co-portfolio manager of the Reaves Utilities ETF, said in a note. “Like MLPs, the utilities sector has long been a reliable source of dividends, but for investors choosing between the two, utilities offer some clear advantages.”
Some have looked to high dividend-paying stocks like master limited partnerships in a prolonged low-yield environment, but utilities may still maintain an amount of certainty for investors.
Rhame pointed out that over the past seven years, utilities have consistently outperformed MLPs and have done so with much lower levels of volatility, which is important to income-oriented investors.
Tax Laws Pose Greater Risk to MLPs Than Utilities
Furthermore, ss shown by last week’s FERC ruling, actual and potential changes to tax laws pose a much greater risk to MLPs than to utilities, Rhame added.
“Investors can find income and growth opportunities in utilities, especially under the guidance of expert managers,” Rhame said. “UTES, the first and only actively managed utilities ETF, has outperformed the S&P Utilities Sector SPDR Fund (XLU) by more than 450 basis points since its inception in September 2015. We take advantage of both regulatory and regional variances by overweighting utilities in areas with relatively better population growth, weather, and industrial activity.
For more information on the utilities sector, visit our utilities category.