After slumping to start 2018, the Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities ETF by assets, and rival utilities funds have come roaring back to life. XLU surged to end the second quarter and is higher by nearly 7% over the past month.
Recently, Morgan Stanley has upgraded the utilities sector to Outperform, arguing that stock prices aren’t keeping pace with earnings growth so far in 2018, which suggests the market participants may be subtly pricing in slowing earnings growth down the line.
“Utilities had taken a backseat to more growth-oriented stocks like technology amid broad economic expansion and the prospect of higher interest rates that could theoretically depress utilities’ prices,” reports CNBC, citing Gina Sanchez, CEO of Chantico Global. “Now, as the market is turning more defensive and a U.S.-China trade tiff has come into focus, utilities look more attractive.”
The sector’s highly domestic has been an advantage at a time of escalating trade tensions between the U.S. and major trading partners, such as China. Additionally, XLU yields almost 3.5%, well above the dividend yield on the S&P 500 or 10-year Treasury yields.
“The group tends to have more reliable fundamentals than high-growth stocks, and many utility names are domestic plays that could withstand international trade tensions,” according to CNBC.
Other ideas among utilities ETFs include the iShares Edge MSCI Multifactor Utilities ETF (Bats: UTLF), John Hancock Multifactor Utilities ETF (NYSEArca: JHMU), Reaves Utilities ETF (NYSEArca: UTES) and Invesco DWA Utilities Momentum Portfolio (NYSEArca: PUI).
No sector is as negatively correlated to rising interest rates as utilities, meaning the longer the Fed resists raising interest rates, the longer high-yielding utilities stocks and ETFs remain compelling destinations for yield-starved investors.
In the second quarter, investors added nearly $387 million to XLU. Just a few days into the third quarter, the fund has seen inflows of almost $300 million.
For more information on the utilities sector, visit our utilities category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.