The Utilities Select Sector SPDR (XLU ) isn’t the most impressive sector ETF this year, but that could change into year end as income investors look to higher yielding assets.
The defensive and yield-generating utilities play is garnering greater attention as a growing number of people are looking to global central banks, including the Fed, to lose monetary policies and execute accommodative measures to obviate a potential economic downturn in response to the coronavirus outbreak.
“Strong 2Q20 Earnings Median earnings per share (EPS) at U.S. electric and natural gas utilities covered by Fitch Ratings increased by 5.0% in 2Q20 from 2Q19,” notes Fitch Ratings. “More than 65% of Fitch’s sample universe of utilities reported a YoY EPS increase for the second quarter.”
Utilities stocks typically do well during an economic downturn as they meet essential services like electricity, gas, and water no matter what the environment looks like, and the sector churns out steady yields, which are especially attractive after the Federal Reserve cuts interest rates to help lift the economy out of a rut.
This year, there is increased concern over inflation this time, which makes utilities a poorer hedge, after the Federal Reserve and the U.S. government pumped out trillions of dollars into the economy.
Utilities are typically more stable stocks since the demand for their services, notably electricity and gas, is steady from both consumers and businesses. Moreover, in a lower-for-longer yield environment, utilities come with more attractive above-average dividends.
“The median change in EPS for 1H20 increased 1.4% compared with 1H19. Strong residential sales and favorable weather this year combined with mild weather last year provided a strong boost to earnings, helping offset commercial and industrial sales declines due to the coronavirus pandemic,” according to Fitch. “2020 Guidance Largely Affirmed The vast majority of utility companies affirmed full-year 2020 EPS guidance during the 2Q20 earnings call, citing cost-cutting initiatives, rate base growth, and favorable weather as counterweights to pandemic-related declines in retail sales.”
The defensive and yield-generating utilities play is garnering greater attention as a growing number of people are looking to global central banks, including the Fed, to lose monetary policies and execute accommodative measures to obviate a potential economic downturn in response to the coronavirus outbreak. XLU, the largest utilities ETF, now yields an impressive 3.18%, far higher than the yields found on the S&P 500 or 10-year Treasuries.