The Evolving Utilities Sector Presents Opportunities in These 2 ETFs

The utilities sector is undergoing its own renaissance as clean energy initiatives come into the forefront. As such, it’s turning into somewhat of a growth sector, pushing aside its staid nature.

The U.S. government is only adding more fuel to the clean energy flame. With funding set to build out infrastructure to support clean energy, this can only power the sector as it undergoes its green transition.

“Our new forecast is more bullish than most forecasts,” wrote Morningstar Research Services’ Andrew Bischof and Travis Miller in a recent report. “We think others underestimate the speed and scale of the U.S. clean energy transition.”

Rate hikes have been increasingly warning investors of a potential recession as the Fed continues to get inflation under control. Tightening monetary policy could come at the detriment of economic growth, which could breed more strength in the utilities sector.

“Unsurprisingly, utilities have benefited from the market’s recession concerns,” the report said. “Utilities also outperformed ahead of the 2001 and the 2007-09 recessions. Once the market digested the last two recessions, utilities’ outperformance quickly reversed.”

Utilities have been benefiting from the recent market rally that started at the tail end of 2022. That strength could persist through the rest of 2023 as the capital markets remain on Fed and inflation watch for the remainder of the year.

“Meanwhile, as 2022 drew to a close, utilities’ stock valuations were as attractive as they’d been in years, their dividend yields were back up to long-term averages, and balance sheets were stronger than ever,” wrote Morningstar’s Laura Lallos.

2 ETF Trade Options to Ponder

As mentioned, the utilities sector will also be undergoing a green transformation, relying more heavily on alternative energy sources. As such, traders can take a look at a broader play on utilities with the Direxion Daily Utilities Bull 3X Shares (UTSL), which seeks daily investment results equal to 300% of the daily performance of the Utilities Select Sector Index.

For a sector-specific play on green energy, consider the Direxion Daily Global Clean Energy Bull 2x Shares (KLNE). The fund seeks to return 200% of its benchmark index, the S&P Global Clean Energy Index, in a single day.

The index gives exposure to developed market countries whose economic fortunes are in the global clean energy business. These include companies that are involved in the production of clean energy or provide green energy technology and equipment.

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