The utilities sector is one of the smallest groups in the S&P 5000 and it could easily be overshadowed at a time when mega-cap growth stocks are driving the market higher. Put simply, many investors view utilities as a group lacking panache.
Owing to its reputation as a fixed income proxy, the utilities sector is viewed as boring by many market participants. Slowly, that label is being shed and that change of tune could be a benefit to exchange traded funds, including the Invesco S&P 500 Equal Weight Utilities ETF (RSPU).
While utilities stocks aren’t setting the investment world ablaze this year, RSPU deserves some credit. It is outperforming the two largest ETFs in this category – both of which are market capitalization-weighted funds. Moreover, RSPU could be worth acknowledging because utilities are playing increasing roles in the renewable energy transition.
Some utilities analysts view the Inflation Reduction Act as a possible longer-ranging catalyst for the sector. This includes some members of the RSPU lineup.
RSPU Could Be a Powerful Sector Idea
Utilities companies are in a prime position to benefit. And not just because of their ability to ensure clean energy reliability grows. But also because more analysts and policymakers see the need to enhance the domestic power grid as crucial and mandatory.
“Looking forward, we see an attractive investment opportunity set. Derisked by the Inflation Reduction Act (which has created incentives for utilities to transition away from fossil fuels to renewables). With the potential to transform the earnings growth and shareholder base across utilities, driving potential for stronger multiple premiums over time,” wrote Goldman Sachs utility analyst Carly Davenport in a recent note to clients.
Goldman initiated coverage of several RSPU member firms due to the companies’ leverage to clean energy, nuclear power, and grid enhancements. Those names include American Electric Power (NYSE: AEP), NextEra Energy (NYSE: NEE), Sempra Energy (NYSE: SRE), and Southern (NYSE: SO). That quartet combines for about 13.3% of the RSPU roster.
Both American Electric Power and NextEra Energy check the boxes of growing renewable energy portfolios and exposure to grid improvements.
“With about 60% of AEP’s five-year capital plan being allocated towards transmission and regulated renewables, we see attractive rate base and earnings growth. In addition to actions taken to optimize the business and improve regulatory lag driving our positive view on the stock,” added Davenport.
Both stocks are down this year. That could be a commentary on investors’ preference for mega-cap growth stocks than it is an indictment of utilities’ fundamentals.
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