Electoral ETF Implications: Stability Rules Supreme for Utilities

The Utilities Select Sector SPDR (NYSEArca: XLU) and other utilities exchange traded funds were somewhat overlooked heading into Election Day, but the income-oriented sector could be subject to electoral implications of its own.

“State and local elections on Nov. 3 will have important implications for utilities such as Xcel Energy (XEL), Pinnacle West (PNW) , and Southern Company (SO),” according to Morningstar.

Utilities are typically more stable stocks since the demand for their services, notably electricity and gas, is steady from both consumers and businesses. Moreover, in a lower-for-longer yield environment, utilities come with more attractive, above-average dividends.

XLU YTD Performance

“Xcel Energy always faces political and regulatory action in its eight-state service territory,” notes Morningstar. “The status quo should support most of its five-year, $22.6 billion investment plan and our 6% annual growth rate. But if Democrats use state and federal power to push clean energy, Xcel’s growth could reach the high end of management’s 5%-7% target.”

XLU: Defensive Plays for Hard Times?

The defensive and yield-generating utilities play is garnering greater attention as a growing number of people are looking to global central banks, including the Fed, to loosen monetary policies and execute accommodative measures to obviate a potential economic downturn in response to the coronavirus outbreak. XLU, the largest utilities ETF, now yields north of 3%, far higher than the yields found on the S&P 500 or 10-year Treasuries.

Utilities stocks typically do well during an economic downturn as they meet essential services like electricity, gas, and water no matter what the environment looks like. The sector churns out steady yields, which are especially attractive after the Federal Reserve cuts interest rates to help lift the economy out of a rut.

“Southern’s new nuclear plant in Georgia is on pace to hit its 2021 and 2022 in-service dates, albeit five years behind schedule and at double the cost. The all-Republican Public Service Commission has supported the $20 billion project throughout. But with Democrats challenging for two open PSC seats, Southern might face pushback for further delays,” according to Morningstar.

Utilities stocks and sector-related exchange have underperformed despite the ongoing coronavirus-induced uncertainty, but this market segment could be a good way for more pessimistic investors to hedge against ongoing risks to this nascent bull run.

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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.