Utilities Stocks Are Outperforming the Market — Here’s Why
I loved playing Monopoly as a kid.
I would eagerly scoop up utilities early in the game. The reasonably priced Electric Company or Water Works were steady-yielding assets.
Decades later, I still see value in utilities.
While they don’t present the allure of exponential growth or sector disruption, they are steady and stable businesses.
And the market’s recent turn toward bear territory is seeing investors fleeing growth sectors like FAANG.
Turn to Utilities During Turbulent Markets
Investors are worried about growth. That’s no more apparent than in the FAANG stocks: Facebook, Amazon, Apple, Netflix and Alphabet (the parent of Google).
This group of thriving tech stocks is the epitome of a growth story.
With confidence shaken in future growth, investors are pouring out of the sector. Apple fell nearly 25% from its high in October.
Even the giant online retailer Amazon rolled off 17% of its valuation in the past two months.
And it’s not just tech giants being hurt by the exiting bulls. The SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) shed 25% of its worth at the same time as the tech giants.
The recent glut of oil inventories on the market hurt energy producers.
The overall S&P 500 is nearly flat for the year. After climbing 9% to an all-time-high in October, it fell 7%.
Investors are on the search for safe-haven assets during these trying times.
Utilities are emerging as one such safe haven.
In the last six months, the SPDR Utilities Index returned 8%. That compares to the S&P 500 Index’s loss of 2.4%.
This is a surprising upset to conventional wisdom. Utilities often underperform during interest-rate hikes like we are seeing now.
The reasons for this surprise performance are simple.
Utilities are slow growers but offer attractive yields. The Utilities Select Sector SPDR ETF (NYSE: XLU) offers a 3.4% yield. Utilities compete with bonds as passive-income plays.
Utilities also carry large amounts of debt. They need to invest in vast amounts of infrastructure to produce and distribute energy.
Rising interest rates make that debt more expensive to service. That cuts into growth and yields.
But despite rising rates, money continues to flow into utilities. The utilities index increased its assets under management by $86 million in the last six months alone.
That tells us the market believes growth will slow to the point that the Federal Reserve lets off the gas on interest-rate hikes.
If economic growth does slow and rates remain around current levels, we are likely to see utilities continue to outperform the broader market in the coming months.
Consider the XLU ETF as a possible safe haven to park your cash during turbulent market conditions. With an attractive yield of 3.4%, it pays you to wait.
Internal Analyst, Banyan Hill Publishing