Utilities ETFs Look to Join the Party

“With rates rising, utilities with stronger cash flows should outperform on their ability to grow dividends and maintain payout ratios. Our integrated Outperforms again head the list…On the other side of this coin, we see tax reforms as pressuring cash flows from purely regulated utilities as lower tax rates are shared with regulated customers, although we also expect regulators to approve mitigation strategies that avoid credit rating downgrades,” according to a Credit Suisse note posted by Barron’s.

As the Fed continues raising interest rates, the higher rates will make fixed-income instruments more attractive on a relative basis, and bond-like equities, like utilities, less enticing. Consequently, utilities may remain flat or underperform other segments of the equities market once rates start ticking higher.

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.

For more information on market sectors, visit our sector ETFs category.