The Utilities sector snatched a lot of limelight this week. The sector had a choppy run through this week. While it was the worst performer among the S&P industry groups for two consecutive days, it emerged as the biggest gainer yesterday. In fact, the Utilities Select Sector SPDR (XLU) had led gains last Friday as well. The Utilities sector has been topsy-turvy owing to movements in bond yields.
However, albeit the recent volatility, utilities continue to be a conservative investment option. Utilities funds are excellent picks for investors seeking a steady income flow through consistent yields from dividends.
Utilities, Bond Yields & Rate Hike
The Utilities sector seems to have developed an inverse relationship with bond yields. Declines in bond yields have helped the sector move north, while an uptrend in yields took it to the opposite direction.
For instance, yields on the 10-year Treasury note increased 3 basis points to 2.5% last Tuesday. This was the highest level in almost six weeks. Higher yield caused the Utilities Select Sector SPDR (XLU) to suffer the most among the S&P 500 sectors on Tuesday. The sector declined 1.2%. The utilities sector was the worst performer among the S&P 500 sectors for the second consecutive day on Wednesday following increase in bond yields. Yields of 10-year Treasury notes increased to 2.54% on Wednesday.
Meanwhile, concerns about an earlier-than-anticipated rate hike primarily boosted bond yields. Investors remained cautious about the fact that recent encouraging economic data may allow the Federal Reserve to raise the short term interest rate earlier than expectations.
The latest FOMC minutes had suggested differing views among the policymakers regarding the timing of the rate hike.
Investing in Utilities Sector
As already said, utilities sector comprise high dividend paying companies. Moreover, while the fortunes of some industries are more allied to the overall economy than others, few show as little volatility and are as stable as the utility sector. Thus, risk-averse investors with a conservative mindset looking for stable current income would do well to select utilities funds .
Here we will suggest three Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) utilities funds . Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.
These funds also provide decent dividend yield and have relatively high returns year to date.
Vanguard Utilities Index Admiral (VUIAX) tracks the performance of MSCI US Investable Market Index (IMI)/Utilities 25/50 by using an indexing investment approach. It seeks to perform in line with the benchmarks index's performance and invests all its assets in stocks that constitute the index.
The fund carries a Zacks Mutual Fund Rank #1 (Strong Buy). It has a dividend yield of 3.26% and has returned 13.7% so far this year.
American Century Utilities (BULIX) seeks current income and capital appreciation. The fund invests the majority of its assets in equities related to the utilities industry. Fund's portfolio is constructed based on quantitative and qualitative management techniques.
The fund carries a Zacks Mutual Fund Rank #2 (Buy). It has a dividend yield of 3.01% and has returned 10.2% so far this year.
MFS Utilities R4 (MMUJX) invests a lion's share of its assets in companies engaged in the utilities industry. These companies may be involved in manufacturing, production, transmission, sale and transmission of electric, gas or other forms of energy. These companies may also belong to the telecommunications industry.
The fund carries a Zacks Mutual Fund Rank #2 (Buy). It has a dividend yield of 2.75% and has returned 15% so far this year.
About Zacks Mutual Fund Rank
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.