Given recent developments in broader markets, many investors are seeking stability.
Utilities are considered a strong defensive game given the constant demand for water, gas and electricity regardless of market conditions. In most countries, these companies have regulated business models, which tend to generate modest but steady profits.
The highly generating nature of utilities translates into regular cash flows. As a result, utility stocks tend to offer solid dividends, which are particularly attractive given that a large number of companies across various industries have cut or completely phased out their dividends since March. When researching companies that are likely to continue to pay dividends in the coming quarters, it is essential to see if a company's earnings can support the payout.
Another positive factor for utilities: lower interest rates in the US and in other countries. Since utilities tend to have high debt on their balance sheets, lower interest rates can improve their bottom line, making them a safe haven.
Exchange Traded Funds (ETFs) allow investors to gain exposure to a range of utilities while avoiding company-specific risks. Here are two worth considering:
1. Utilities Select Sector SPDR Fund
Current price: $ 59.07
52 week range: $ 43.44- $ 71.10
Dividend Yield: 3.29%
Expense Ratio: 0.13% per year, or $ 13 with an investment of $ 10,000
The Utilities Select Sector SPDR® Fund (NYSE 🙂 provides exposure to utility companies, independent power producers and energy traders. The fund was first listed in December 1998.
XLU, which tracks the Utilities Select Sector Index includes 28 companies. The most important sectors (by weighting) are Electric Utilities (62%), Multi-Utilities (32%), Water Utilities (3%), Gas Utilities (1.5%) and Independent Power and Renewable Electricity Producers (1.5%). )
The top ten holdings make up approximately 65% ??of total assets under management, which amounts to nearly $ 12 billion. XLU's five largest companies are NextEra Energy (NYSE :), Dominion Energy (NYSE :), Duke Energy (NYSE :), Southern Company (NYSE :), and American Electric Power Company (NYSE :).
So far this year, the fund is down 8.5%. However, it is up about 40% since the March lows. The forward P / E and P / B ratios of XLU are 18.57 and 2.06, respectively. Long-term investors may want to consider buying the dips, especially if the fund moves towards the USD 55 level.
2. iShares Global Infrastructure ETF
Current price: $ 40.14
52 Week Range: $ 28.19 – $ 49.93
Dividend Yield: 3.04%
Expense Ratio: 0.46% per year, or $ 46 with an investment of $ 10,000
The iShares Global Infrastructure ETF (NASDAQ 🙂 provides exposure to companies providing transportation, communications, water, and electricity services worldwide. IGF invests in infrastructure stocks from around the world, as in many countries utility growth is part of a region's infrastructure development. The fund was launched in 2007.
IGF, which tracks the index, has 75 companies. The sectoral composition of the fund (by weighting) is Utilities (40.4%), Transport (30.4%) and Energy (19.8%). The remainder (0.40%) concerns cash and cash equivalents and derivatives. In other words, IGF offers exposure to utilities as part of a broader fund that also includes transportation and energy stocks.
The top ten holdings make up about 40% of net assets, which are just over $ 3 billion. The fund's five largest companies are NextEra Energy, Enbridge (NYSE 🙂 Aena SME (MC :), Transurban Group (ASX 🙂 and TC Energy (NYSE :).
In terms of geographic breakdown, the US (37.3%) tops the list, followed by Canada (11.1%), Australia (10.7%), Spain (8.4%) and Italy (7.9%).
Year-to-date, the IGF is down 16.2%. This measure does not include the dividend payment. The underlying P / E and P / B ratios are 17.31 and 1.75, respectively. Long-term and recalcitrant investors may start to find value if the price falls further towards the USD 37 level.
Bottom Line
While many stocks on Wall Street have recouped their losses since the March decline, investors are still unsure whether the economy will really make a full recovery. September may be an appropriate time for market participants to scrutinize their portfolios to see if they are built to withstand a potential contraction.
For those who think we are entering a period of economic slowdown, utility ETFs are worth considering.
