3 Utility ETFs Surviving the Market Turmoil - ETF News And Commentary

The geopolitical tensions between Russia and Ukraine were one of the prime reasons for the nervousness prevailing in the market over the last couple of days. The S&P 500 has faced some weakness in March, and there are definitely questions regarding the benchmark’s near term outlook.  

Also, lingering concerns about a possible slowdown in the world’s second largest economy – China – contributed to the fall. A larger-than-expected decline in Chinese exports, coupled with less than expected figures for industrial production, fixed asset investment and retail sales added fuel to the fire (read: China ETFs Slump on Terrible Export Numbers).

Moreover, less-than-expected growth in Japan was also a factor contributing to the prevailing negative sentiments. The markets were so downbeat about the negative factors that encouraging economic reports on retail sales and unemployment benefits failed to lift the gloom.

If that wasn’t enough, many high flying sectors like technology and biotech have been under severe pressure as of late. These sectors have been hit hard by bubble fears and declining momentum, forcing many investors to look elsewhere for exposure.

Market Impact

Given the international turbulence as well as the high beta pain, portfolio managers and investors tilted their focus to defensive sectors including the utilities. The utility sector exhibits less volatility, and as such, is a good bet in uncertain times and in times of an economic slowdown.  

Moreover, yield hungry investors are flocking to this sector in the current low-rate environment. Utility companies pay large dividends relative to the rest of the market.

Also, the near zero rates is quite favorable for the utility companies to operate in. Massive infrastructure required by the utility sector places an immense debt burden and, as a result, increases the interest obligation of these companies.

This fact also explains why the current low rates prevailing in the economy is working well in favor of the utility companies leading to outperformance (read: 3 Sector ETFs Benefiting from Plunging Interest Rates).

The utility sector shunned the broader market downtrend lately, with 

Utilities Select Sector SPDR ETF

(

XLU

) rising around 1.3% as against a loss for the broader market representative, SPDR S&P 500 (SPY), over the past five days.

Moreover, this sector has been outperforming broader market indices since the start of the year as well. The sector has been hitting new 52-week highs every passing day.

Below we have highlighted three ETFs that have been top performers in the utility space in the last one week (see all the Utility ETFs here).

Utilities Select Sector SPDR ETF

(XLU) 

XLU is the largest and the most popular ETF in the utilities space. The product tracks the S&P Utilities Select Sector Index and has amassed $5.4 billion since its inception.

The fund holds a small basket of 32 stocks, with around 60% of its assets devoted to its top 10 holdings, suggesting higher concentration risk. Duke Energy (9.21%), NextEra Energy (8.12%) and Dominion Resources (8.11%) occupy the top three positions of the fund.

Within the broader utilities sector, the fund has a little more than half of its total fund exposure to the electric utilities industry. This is followed by a 39.08% exposure to multi-utilities, followed by a small exposure to independent power and renewable electricity producers and gas utilities.

XLU has gained 1.3% in the last one week and is currently trading very close to its 52-week high of $41.44. The product has added 7.4% since the start of the year.

MSCI Utilities Index ETF

 (FUTY)

Launched in October 21, 2013, the fund seeks to track the MSCI USA IMI Utilities Index before fees and expenses.

The fund holds a basket of 79 stocks with the top three holdings being Duke Energy Corp. (7.92%), NextEra Energy Inc. (6.51%) and Dominion Resources Inc. (6.43%). Style-wise, FUTY primarily invests in mid-cap value stocks and, with annual fees of 12 basis a year, the fund is the lowest cost option in the utilities space.

The fund has added 1.3% in the last week and has recently made a new 52-week high of $26.88. The fund is up 8.6% since the beginning of 2014 (read: The Comprehensive Guide to Utility ETFs).

iShares U.S. Utilities ETF

 (IDU)

The fund too gives investors an exposure to U.S. utilities stocks and manages an asset base of $620.9 million. IDU is home to 63 stocks and is heavily concentrated in its top 10 holdings. Duke Energy Corp. (8.20%), Nextera Energy Inc. (6.67%) and Dominion Resources Inc/Va. (6.66%) are the top three holdings of the fund.

Sector-wise, the fund invests around 70% of its assets in the electricity sector, while the rest goes towards gas, water and multi-utilities.

Bottom Line

Apart from global worries, the U.S. stock market has been a victim of soft economic data since the start of the year. These data points led investors to flock to safer sectors such as the utilities. If the economy continues to divulge numbers that point to weakness, the sector might continue to tread higher.

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FID-UTILITY (FUTY): ETF Research Reports

ISHARS-US UTIL (IDU): ETF Research Reports

SPDR-SP 500 TR (SPY): ETF Research Reports

SPDR-UTIL SELS (XLU): ETF Research Reports

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