Utilities ETFs Can Win Even as Rates Rise | ETF Trends

There’s plenty of conventional wisdom as it pertains to asset allocation against the backdrop of rising interest rates.

At the sector level, that wisdom usually centers around buying financial services stocks and avoiding utilities names owing to the latter’s capital-intensive nature. However, that conventional wisdom isn’t playing out this year, as highlighted by the S&P 500 Utilities Index’s 2% year-to-date gain.

The Invesco S&P 500 Equal Weight Utilities ETF (NYSEArca: RYU) is really strutting its stuff. Showing that utilities stocks don’t always whiff as rates rise, the equal-weight exchange traded fund is higher by 5% year-to-date, and more upside could be on the way.

In a recent note to clients, Credit Suisse analyst Nicholas Campanella waxes bullish on some utilities, including some RYU components such as Atmos (NYSE:ATO).

While Atmos may be lacking for near-term company-specific catalysts, Campanella says that the company is a high-quality local utility that has the potential to top 2023 earnings estimates. Atmos is one of the 30 stocks found in RYU and commands 3.33% of the equal-weight ETF’s roster.

RYU follows the S&P 500® Equal Weight Utilities Plus Index, and it features exposure to several other stocks that could deliver for investors over the remainder of 2022.

“CenterPoint Energy (NYSE:CNP), started with an Outperform rating and $34 PT, has been realizing the benefits of a wider restructuring, Campanella said, believing the stock can still benefit from multiple expansion,” according to Seeking Alpha.

CenterPoint is RYU’s fifth-largest holding at a weight of 3.6%. Credit Suisse’s top ideas in the utilities sector are American Electric Power (AEP), Duke Energy (DUK), Entergy (ETR), and Sempra Energy (SRE). That quartet combines for approximately 14% of the RYU portfolio.

The bank also has “outperform” ratings on Ameren (AEE), Evergy (EVRG), FirstEnergy (FE), PG&E (PCG), and PPL Corp. (PPL). Ameren, Evergy, FirstEnergy, and PPL also combine for over 14% of RYU’s weight.

Electric and multi-utilities combine for about 90% of RYU’s weight. Two-thirds of the funds, including large- and mid-cap utilities, are value stocks. The remainder are blend stocks. RYU, not surprisingly, holds no growth stocks. Over the past two years, the equal-weight ETF beat its largest-cap weighted rival by 200 basis points while displaying comparable volatility on an annualized basis.

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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.