The rising probability of aggressive interest rate hikes to curb inflation and intensifying geopolitical strife are wreaking havoc on the stock market. Investor sentiment has been dampened significantly over the past few weeks. The bearish sentiment measure by the American Association of Individual Investors has recorded a reading of 59.4%, the highest since March 2009. Moreover, former Fed vice chair Roger Ferguson recently conceded that “A recession at this stage is almost inevitable.”
Amid such bearish sentiment, the utility industry could help investors cushion their portfolios because relatively inelastic demand for electricity, water, and natural gas help companies in this space perform steadily irrespective of market or economic conditions. Furthermore, the dividend pay-outs of utility companies could help generate a steady income stream.
Utilities Select Sector SPDR ETF (XLU)
One of the most popular alternatives for investors trying to gain exposure to the U.S. utility sector, XLU is useful for establishing low-risk equity exposure. It is a stable fund, ideal for those with a tilt towards the low beta sector of the U.S. market.
With $15.61 billion in assets under management (AUM), XLU’s top holdings include NextEra Energy, Inc. (NEE), with a 13.91% weighting, followed by Duke Energy Corporation (DUK) at 8.44%, and Southern Company (SO) at 7.73%. It currently has 30 holdings in total. Over the past month, the ETF’s net inflows were $982.60 million. In addition, its 0.10% expense ratio compares favorably to the 0.43% category average.
XLU pays a $2.01 annual dividend, which yields 2.85% at the prevailing price. Its four-year dividend yield stands at 3.11%. Its dividends have increased at 3.7% CAGR over the past five years. Over the past year, the fund has gained 5.7%.
It is no surprise that XLU has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. In addition, it has an A grade for Trade and a B grade for Buy and Hold.
Vanguard Utilities ETF (VPU)
VPU offers exposure to the domestic utility sector with low volatility or low risk and high dividend yields. It is more appealing to investors looking to establish a shorter-term tactical tilt or make a sector rotation play.
NEE has a 13.80% weighting in the fund as its top holding, followed by DUK at 7.13% and SO at 6.38%. VPU has $6.26 billion in AUM. It has 66 holdings in total. Its net inflows came in at $224.15 million over the past month. Its 0.10% expense ratio is lower than the 0.43% category average.
VPU pays a $4.28 dividend annually, yielding 2.79% at the current price. Its four-year average dividend yield stood at 3.03%. Its dividends have increased at a 3.34% CAGR over the past five years. The fund has gained 5% over the past year.
VPU’s strong fundamentals are reflected in its POWR Ratings. It has an overall B rating, which translates to a Buy in our proprietary rating system.
It has an A grade for Trade and a B grade for Buy & Hold grade. VPU is ranked #4 in the Utility ETFs group. Click here to see VPU’s Peer grade.
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XLU shares were trading at $71.24 per share on Tuesday morning, up $0.71 (+1.01%). Year-to-date, XLU has gained 0.19%, versus a -12.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Riddhima Chakraborty
Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries. More...
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