Investors should keep tabs on ETFs tracking the utilities sector because they can provide important clues on overall risk appetite in the market.
Utilities stocks are a traditionally defensive and stable that investors often favor when they're seeking safe havens to ride out market storms. When utilities ETFs are outperforming the market, it can mean investors are gun-shy. When they trail the market, investors are often in a risk-on mindset.
Utilities ETFs outperformed the S&P 500 in May, but have been about neck-and-neck with the market the past two months. After a glitch in computer algorithms pushed utilities exchange traded funds into volatile action Wednesday, utilities stocks were weaker along with the broader equities market Thursday.
Utilities Select Sector SPDR ETF (XLU) and Vanguard Utilities ETF (VPU) are among the largest ETFs indexed to the sector. Both funds have gained almost 6% over the past three months as investors sought out safe, defensive plays with decent yields. XLU has a 3.68% 12-month yield and VPU has a 3.46% yield.
Utilities stocks are known for operating stable businesses with predictable dividend returns, qualities that investors like during rough market conditions. For instance, the sector outperformed the broader market in May when the Eurozone troubles first started up this year.
If the sector begins to underperform the overall market, it may be a positive sign for stocks since it would indicate that investors are beginning to move away from defensive plays and take on riskier assets.
On Wednesday, utilities sector ETFs were under the spotlight after jumping 5% on heavy volume in about 30 minutes of "unusual activity," with VPU trading volume about 77 times the average.
Other utility ETF options include:
- iShares Dow Jones U.S. Utilities ETF (IDU): 3.21% yield.
- iShares S&P Global Utilities Sector ETF (JXI): 4.39% yield.
- First Trust Utilities AlphaDEX ETF (FXU): 2.53% yield.
- Guggenheim S&P Equal Weight Utilities ETF (RYU): 3.24% yield.
Max Chen contributed to this article.
Read the disclaimer: Tom Lydon is a board member of Guggenheim Investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.