Turn the Lights on to These Utilities ETFs


The 2022 market environment is one that is trying investors’ souls, confirming that reducing volatility is an advisable option.

That’s a strategy that’s easily deployed at the sector level. Just look at the utilities sector. Far from glamorous, utilities stocks and exchange-traded funds are often viewed through lens of being bond proxies. So while the sector lacks “sex appeal,” it is useful in volatile market climates because it’s historically less turbulent than the broader market.

Year-to-date, the S&P 500 Utilities Index is beating the S&P 500 by more than 1,100 basis points while yielding more than double that of the broader equity benchmark. That less bad performance by utilities stocks is happening with less volatility – notable considering the challenges brought by rising interest rates to this rate-sensitive group.

Overall, utilities ETFs aren’t perfect at the moment, but the yields are attractive, the volatility traits are favorable and the potential upside are perhaps more compelling than Treasuries. With those factors in mind, some of the following utilities ETFs may be worth considering.

Utilities Select Sector SPDR (XLU)

The Utilities Select Sector SPDR (XLUis the big kahuna and godfather of utilities ETFs, and it’s served conservative and income-minded investors for more than two decades. XLU isn’t glitzy or glamorous, but it is relevant today.

“However, the Utilities sector has shown a more stable earnings outlook,” noted Anqi Dong, senior research strategist at State Street Global Advisors (SSGA). “Since utilities generally pass fuel, operational and maintenance costs to customers and demand for their services is inelastic, high inflation has had little impact on the sector’s bottom line this year. In fact, Utilities is the only sector, barring Energy, that has seen earnings upgrades for this year and stable earnings for next year.”

Add to that, XLU could be a prime idea for investors looking for shelter from the storm in the event a legitimate recession arrives.

“According to our sector business cycle analysis, Utilities outperformed the broad market during all past recession periods by an average of 11% and was one of the three best-performing sectors during recession,” added Dong. “Utilities also has historically outperformed the broad market when the yield curve flattens , signaling weak economic growth prospects similar to the current market environment.”

Goldman Sachs Future Real Estate and Infrastructure ETF (GREI)

As its name implies, the Goldman Sachs Future Real Estate and Infrastructure ETF (GREI) isn’t a dedicated utilities ETF, but it has ample exposure to that sector. Something that newer investors may not be aware of is the fact that utilities stocks are valid infrastructure plays, enhancing the viability of GREI in the current environment.

“Infrastructure assets, on average, are also less sensitive to inflation,” according to Goldman Sachs Asset Management (GSAM). “Even so, not all assets are created equally. The current environment may aid infrastructure businesses with inflation-linked pricing, inelastic demand and stable cost structures, while adversely affecting those that don’t hold such attributes.”

GREI is an actively managed ETF, so it’s possible the fund’s managers can allocate to the real estate and utilities stocks that aren’t as rate sensitive as the broader peer groups.

Invesco S&P 500 Equal Weight Utilities ETF (RYU)

The Invesco S&P 500 Equal Weight Utilities ETF (RYUoffers investors the benefits a dividend yield of north of 3% – comparable to cap-weighted peers – without the concentration risk so often found among cap-weighted utilities ETFs. None of RYU’s 31 components exceed a weight of 4.44%, which is pretty good among utilities ETFs. Plus, there’s a case for RYU as some utilities are prioritizing simpler, streamlined business models.

“In recent years, utilities have become much simpler, having sold or spun off units that are riskier than or less related to their regulated, monopoly business,” reported Jinjoo Lee for the Wall Street Journal. “Exelon, for example, spun off earlier this year a business unit that has exposure to competitive electricity markets. CMS Energy last year sold off a bank subsidiary.”

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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