U.S. markets closed the month as the worst May performance since 2012, in the wake of new proposed tariffs that President Trump has aimed at Mexico. Oil has been thrashed to the tune of nearly 6% down, and almost every market sector from technology to financials is feeling the heat today. But one sector has remained stalwart despite the market decline: utilities.
Investors who are looking for companies to invest in that carry minimal risk will often consider utility stocks. Utility companies typically comprise 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 utilities sector is one of this year’s best-performing groups, underscoring the notion that many investors will embrace utilities stocks and exchange traded funds during favorable interest rate environments. It is widely expected the Federal Reserve will not raise interest rates this year and some bond market participants are betting on a rate cut late this year.
The Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities ETF by assets, is up 0.5% today and over 10% this year and yields 3.11%, well above the yield on 10-year Treasuries or the S&P 500. All this depsite the fact that the Dow Jones Industrial Average, S&P 500, and Nasdaq cascading downward 1.5%.
“Yet for income investors, utilities’ dividends have rarely looked so attractive. U.S. utilities’ 3.4% average yield is 90 basis points above the 10-year U.S. Treasury yield as of late March, a reliable buy signal,” said Morningstar in a recent note. “Most utilities’ dividends are well-covered and set to grow more than 5% annually the next three to five years. We think some utilities’ dividend growth could top 10% for several years. Apart from a few special situations, we see no risk of dividend cuts across the sector.”
The Vanguard Utilities ETF (VPU) is another ETF that focuses on utility stocks, seeking to track the performance of a benchmark index that measures the investment return of stocks in the utilities sector. The fund is passively managed, resulting a low 0.10% expense ratio, using a full-replication strategy when possible and a sampling strategy if regulatory constraints dictate. VPU includes stocks of companies that distribute electricity, water, or gas, or that operate as independent power producers.
For investors that want some utilities exposure without the commitment of a dedicated ETF such as XLU, there are other fund to consider. Those ETFs include the ProShares S&P MidCap 400 Dividend Aristocrats ETF (CBOE: REGL) and the ProShares Russell 2000 Dividend Growers ETF (CBOE: SMDV).
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