With interest rates low and the possibility of market volatility returning, the Utilities Select Sector SPDR (NYSEArca: XLU) remains a viable sector ETF consideration for an array of investors.
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.
“Among sector ETFs, utilities funds like the Utilities Select Sector SPDR are generally considered boring, with income being the most exciting trait offered by this group. XLU yields 3.25%, far exceeding the yields on the S&P 500 and 10-year Treasuries,” reports InvestorPlace.
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.
Bright Idea
The defensive utilities sector typically covers 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.
The utilities sector’s regulated earnings and high payouts mean they are often treated as bond proxies, and their yields exhibit a close relationship to corporate debt yields.
“This sector usually isn’t associated with growth, but for patient investors, XLU can offer some growth as renewables become a more significant part of the energy equation,” according to InvestorPlace.
Furthermore, as a domestic sector that many consumers rely on, regardless of the economic environment, power and gas demand will continue to see steady demand, compared to other areas of the economy that are already suffering through fundamental shocks. The sector also exhibits a law of correlation with GDP growth over the long term.
Consequently, looking ahead toward the upcoming S&P earnings season, even if other sector earnings continue to drop, those of utilities should remain relatively insulated. However, looking toward a more long-term view, it is likely the more beaten-down sectors directly affected by everyone staying home will outperform as they recover.
“Natural gas infrastructure development underpinned much of the sector’s growth during the last decade. Renewable energy will be this decade’s growth opportunity,” notes Morningstar. “Utilities that are more aggressive, with billion-dollar investments in projects like offshore wind and utility-scale batteries, could be big winners.”
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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.
