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.
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
The utility sector shunned the broader market downtrend lately,
Utilities Select Sector SPDR ETF
) rising around 1.3% as against a loss for the broader market
representative, SPDR S&P 500 (
), 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 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
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
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
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
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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