Defensive Utilities ETFs Have Been a Great Play so Far This Year

Utilities stocks and sector-related ETFs are outperforming in the new year as low yields in the fixed-income market and the coronavirus outbreak pushed investors toward this defensive play.

The best performing utilities sector-related ETFs so far in January include the Utilities Select Sector SPDR (NYSEArca: XLU) up 6.0%, Invesco DWA Utilities Momentum Portfolio (NASDAQ: PUI)  up 5.7% and Vanguard Utilities ETF (NYSEARCA: VPU) up 5.5%.

Utilities stocks are now outperforming every other area of the S&P 500 and the benchmark index, the Wall Street Journal reports.

Fueling the fear and defensive trade, the coronavirus outbreak in China has infected thousands and already killed over 100 people. Many are concerned about the potential negative effects that would affect the economy if industries are put to a standstill to combat the contagion.

Utilities are typically seen as a defensive sector or a more steady area of the market to ride out the volatility. These companies typically offer the most fundamental necessities, such as food, water, and shelter, or are closely related to the energy required to refrigerate food, heat up water and light up a house.

The sector also provides a steady dividend, providing investors with a bond-esque income return. Furthermore, in a lower-for-longer interest rate environment, the yields on utilities makes them that much more attractive to income-minded investors.

For example, XLU shows a 2.95% 12-month yield, PUI has a 2.02% 12-month yield and VPU comes with a 2.82% 12-month yield. In comparison, yields on the benchmark 10-year Treasury note was at 1.61%. It is not surprising that bond yields and dividend-payers like utilities move inversely as investors look for alternative sources of yield in defensive plays like utilities in a low-rate environment.

The utilities sector was also one of last year’s best-performing areas, underscoring the notion that many investors will embrace utilities and related ETFs during favorable interest rate environments after the Federal Reserve cut interest rates three times.

For more information on the utilities sector, visit our utilities category.