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Are Utilities And Their 3.4% Yield Set To Outperform?
- Utilities, via the XLU, look attractive here.
- Persistently low rates make the 3.4% yield look even better.
- XLU's under performance of the broader market may be coming to an end.
- The Utilities exchange traded fund ranked second by returns among the nine Select Sector SPDRs during the first three quarters of 2014.
- The ETF ranked first by the same metric among the sector SPDRs over the first half of this year.
- Seasonality analysis indicates the ETF's fourth quarter is neither its strongest nor its weakest of the year.
- Portfolio diversification is a primary objective for most investors in any market environment and a particularly high priority today.
- In 2014, a surprising new category has emerged from within the stock market itself to become an effective portfolio diversifier in the current environment.
- Utilities are providing a far greater diversification benefit today than normal and may be worth a closer look following a recent pullback.
- History points to rising interest rate cycles of 2004 to 2007, 1993 to 2000, and 1986 to 1989.
- At the top of the cycle, the yield curve flattens.
- Utilities continued to provide positive total returns from the beginning of tightening to the end of tightening. Shareholder problems lie in the down cycle, not the up cycle.
The Best-Performing Sector Of 2014 May Surprise YouCovestor • Thu, Jul. 10
- Utilities are seen as a defensive sector that investors tend to flock to during times of heightened uncertainty in the market.
- The strength of utilities stocks also suggests investors are playing defense, and that interest rates could be heading lower.
- The underperformance of consumer cyclical stocks is another worrying sign for the health of the overall market and the broad economy.
Utilities Select Sector SPDR ETF: XLU's 2014 Halftime Report And Seasonality
- The Utilities ETF was the No. 1 performer ranked by returns among the nine Select Sector SPDRs during the first half of this year.
- In contrast, the ETF was the No. 9 performer ranked by the same metric among the sector SPDRs over all of last year.
- Meanwhile, seasonality analysis indicates the ETF just exited its strongest quarter of the year.
- Mr. Market’s change in mood from manic last year to depressive this year is mirrored by the behaviors of the Select Sector SPDRs partitioning the S&P 500 into nine pieces.
- The Utilities ETF was the worst performer among the Select Sector SPDRs in 2013, when it advanced to an adjusted $37.66 from $33.31, a gain of $4.35, or 13.06 percent.
- However, the Utilities ETF was the best performer between Jan. 1 and April 17 in 2014, when it climbed to $42.30 from $37.66, an increase of $4.64, or 12.32 percent.
- Headwind: Analysis of the Utilities ETF’s seasonality indicates the SPDR’s highest mean and median monthly returns came in April during the first 15 full years of its existence.
- Tailwind: Earnings-per-share estimates published by S&P Dow Jones Indices appear more reasonable for the utilities sector than they do for the S&P 500’s other sectors.
- In many high-yield sectors CEFs offer a better investment profile than related ETFs.
- The example used in this article is the utility sector, represented by the ETF XLU.
- Discusses the portfolio impact for both long-only and long/short investors.
- During the average 6 month period over the last 10 years, the utility ETF XLU has generated returns of about 4.31%.
- XLU shareholders suffered a drawdown of about 37.5% during one of those 6 month periods.
- A hedged utility portfolio, such as the one shown below, can offer a higher potential return with a third of that drawdown risk.
- This hedged portfolio has a negative cost, meaning the investor essentially would be getting paid to hedge with it.
Low Risk, Best Return: Utilities Sector In January
7 Reasons To Own Utilities After The Recent Pullback
There are no Transcripts on XLU.
Wed, Nov. 26, 1:05 PM
- The EPA formally proposes reducing ground-level emissions limits to 65-70 ppb from their current level of 75 ppb, and says it will take comments on possibly cutting limits to 60 ppb, a standard favored by environmental and public health groups.
- The American Fuel & Petrochemical Manufacturers warns, “This regulation promises to be the most expensive in U.S. history," which it says could lead to millions of jobs lost and hundreds of billions of dollars every year in costs to U.S. businesses.
- Back in 2011, the EPA itself estimated that such a standard could cost businesses as much as $90B/year; in the new proposal, the EPA estimates costs of no more than $15B in 2025.
- ETFs: XLE, XLU, ERX, VDE, IDU, KOL, OIH, VPU, ERY, DIG, DUG, IYE, FENY, PXJ, RYU, UPW, RYE, FUTY, FXN, FXU, SDP, DDG
Mon, Nov. 24, 2:34 PM
- "While the thirst for yield is understandable, it may be leading investors to overpay and take on hidden risks," says BlackRock CIO Russ Koesterich, noting defensive sectors like utilities (NYSEARCA:XLU) and consumer staples (NYSEARCA:XLP) are priced aggressively, but carry high interest rate sensitivity. Should rates rise even modestly in 2015, these sectors (REITs too) are likely to perform poorly.
- Yield can be found elsewhere, though, he says, pointing out cyclical sectors and high yield as areas to benefit from the improving economy.
- ETFs: XLU, XLP, IDU, VPU, VDC, FXG, RYU, UPW, FUTY, RHS, FSTA, PUI, FXU, PSL, SDP, PSCC, PSCU
Thu, Nov. 13, 2:55 PM
- Chief execs of the top U.S. coal-burning utilities predict blackouts and rising power bills if they are not given more time to achieve greenhouse gas emission cuts described in the new climate agreement with China.
- A proposed timeline for cutting pollution from power plants threatens to shutter coal-fired plants before enough new generation can be built to replace lost supplies, say CEOs of Southern Co. (NYSE:SO) and American Electric Power (NYSE:AEP).
- The challenges go beyond the cost and time it would take to build new plants to replace coal units forced into retirement, Southern's Thomas Fanning and AEP's Nick Akins say; there’s not enough pipeline capacity to carry the natural gas that would be needed by all the newly built gas-fired power plants spawned by the EPA's proposals.
- Southern would have to retire more than 9K mw of coal-fueled generators and add ~5,400 mw of natural gas plants by 2020 under plans envisioned by EPA, Fanning says.
- ETFs: XLU, IDU, VPU, RYU, UPW, FUTY, PUI, FXU
Wed, Nov. 12, 6:57 PM
- Utility stocks tumbled today amid Pres. Obama's plan with China to curb greenhouse gas emissions, and will renew a push by environmental activists to deny government approval of pipeline projects such as Keystone XL (NYSE:TRP) and Alberta Clipper (NYSE:ENB) that would carry Canadian oil sands crude to U.S. refineries.
- “Achieving these goals will almost certainly require changes to the implementation of the EPA power plant regulations,” Council on Foreign Relations analyst Michael Levi says, referring to draft rules issued by the EPA in June that already have sparked pushback.
- Congressional Republicans, soon to have a majority in the Senate in addition to the House, promise to do everything possible to stop Obama’s emissions targets for power plants; the administration believes GOP gains mean Obama will not get legislative help in achieving his goals but that Republicans are unlikely to be able to stop executive orders and environmental regulations.
- ETFs: XLU, IDU, VPU, UPW, RYU, FUTY, FXU, SDP
Wed, Nov. 12, 2:14 PM
- Utility stocks, among the year’s top performing sectors in the market, are sharply lower today - a bad sign, says Weeden & Co. head researcher Michael Purves, who believes now is the time to reduce or hedge utility holdings such as the Utilities Select Sector SPDR Fund (XLU -1.9%).
- Ultra-low bond yields have made utility stock payouts look good by comparison., but valuations have been moving up; Purves says the rally has put XLU’s P/E ratio for the next 12 months at 17.4x, near a 10-year high.
- Investors ought to “start to take profits, given the run was getting long in the teeth,” Purves writes.
- The top 10 XLU holdings are all lower today: DUK -2.5%, NEE -1.7%, D -1.9%, SO -1.4%, EXC -2.8%, AEP -2%, SRE -1.7%, PPL -1.8%, PCG -1%, PEG -2.8%.
- Other ETFs: IDU, VPU, UPW, RYU, FUTY, FXU, PUI, SDP
Thu, Oct. 9, 4:00 PM
- It's unlikely that the strong dollar will impact Q3 earnings as much as people think, Diane Garnick, CEO of global asset management firm Clear Alternatives says. But it will impact Q4 earnings. We're likely to see companies meet or exceed earnings in Q3, but give downward forecasts for Q4, she says.
- Companies with bigger international exposure, like Wal-Mart (NYSE:WMT) will lower their estimates more. The same is true for sectors dominated by companies with global exposure like financials (NYSEARCA:XLF).
- Conversely, companies like Walgreen (NYSE:WAG) who are almost all U.S. dollar based will be less impacted by a stronger dollar. Also relevant for ETFs like XLP and XLU.
- Link: Reuters Insider
Fri, Oct. 3, 4:18 PM
Fri, Sep. 19, 2:14 PM| Comment!
Thu, Sep. 18, 12:53 PM
- Banks, insurers, brokerages and anything else starved for yield continue to gain following yesterday's FOMC news. Among the gainers are Bank of America (BAC +1.9%) - which breaks above $17 for the first time since April - Citigroup (C +2.7%), Wells Fargo (WFC +1.1%), PNC (PNC +1.1%), Fifth Third (FITB +1.7%), SunTrust (STI +1.2%), Schwab (SCHW +2.3%), Prudential (PRU +2.5%), and Lincoln National (LNC +2.4%).
- The XLF +1.2%, KBE +1.5%, and KRE +2%.
- Financial sector ETFs: XLF, FAS, FAZ, UYG, KRE, VFH, KBE, IYF, IAT, SEF, IYG, FXO, KBWB, FNCL, RKH, QABA, FINU, KRU, KBWR, RWW, RYF, KRS, FINZ
- Lit up bright red is the utility sector (XLU -1%), led by Southern Company (SO -1.1%), Dominion Resources (D -1.2%), Duke Energy (DUK -1.4%), and Pinnacle West (PNW -1.9%).
- Utility ETFs: XLU, IDU, VPU, UPW, RYU, FUTY, PUI, FXU, SDP, PSCU
Sat, Aug. 9, 8:25 AM
- Investors who had flocked to utility stocks now may be wondering what went wrong, after the sector was the S&P's worst performer in July.
- Fears of rising interest rates have recently sent dividend-paying stocks and high-yield junk bonds tumbling; utility stocks also have been hurt by the power sector's growing exposure to volatile natural gas prices, which have dropped ~19% since mid-June.
- Some analysts think dividend growth among utilities could slow or even stop, with power demand falling and utilities being forced to spend record amounts on replacing and upgrading aging plants and meeting stricter emission standards; Exelon (NYSE:EXC) and FirstEnergy (NYSE:FE) are big utilities that have cut dividends this year.
- Utilities that auction the power they generate - and are most exposed to moves in gas prices - have fallen the most; NRG and EXC have lost 20% and 13%, respectively, since the end of June.
- Regulated utilities such as Southern Co. (NYSE:SO) and Duke Energy (NYSE:DUK), whose rate changes are more closely controlled, haven't been hit as hard.
- ETFs: XLU, IDU, VPU, NLR, JXI, NUCL, UPW, RYU, DBU, IPU, FUTY, FXU, SDP, UTLT
Thu, Jul. 31, 3:38 PM
- Heading into the month's last few minutes of trading, the Dow (DIA -1.7%), S&P 500 (SPY -1.8%), and Nasdaq 100 (QQQ -1.9%) are all near 2% declines and well into the red for the month.
- These selloffs often lead to strength in defensive sectors like utilities (XLU -1.4%), health care (XLV -1.9%), or mREITs (REM -0.9%), but not today.
- Also not rallying are Treasury prices (TLT -0.3%) or gold (GLD -1%).
Tue, Jul. 29, 12:20 PM
- Americans are plugging in more gadgets than ever, and the U.S. unemployment rate has been improving, but these trends have provided little help for the country's electric utilities.
- U.S. electricity sales look anemic for the seventh year in a row, prompting some executives to abandon their century-old assumption that electricity use tracks overall economic conditions, according to a WSJ analysis.
- The diverging trends could pose a problem for utility companies, which often need to expand sales volume yearly just to maintain their expensive equipment.
- The U.S. Energy Information Administration says it no longer foresees any sustained period in which electricity sales will keep pace with economic growth.
- ETFs: XLU, IDU, VPU, UPW, RYU, FUTY, FXU, SDP
Fri, Jul. 11, 11:10 AM
- Morningstar’s Robert Goldsborough thinks utilities are unlikely repeat their mid-2013 swoon, asserting that investors now are pricing in 4% U.S. Treasury yields, which would suggest no substantial downward moves in utilities if rates hit that level; utilitiy companies also could continue their recent outperformance if Treasury rates stabilized close to 3%.
- On the other hand, Brendan Conway of Barron's sees this as reason for caution in the long run; if the climate of falling rates since 2000 is one of the drivers of utilities’ tremendous decade-plus performance, then the end of that climate would seem to bode ill for ETFs such as VPU and XLU.
- Also: IDU, UPW, FUTY, RYU, PUI, FXU, SDP, PSCU
Tue, Jul. 8, 12:26 PM
- Leading this week's decline are a lot of the same names which led March's "momo" selloff, among them the biotechs (XBI -4.5%) and social media (SOCL -4.4%). Also familiar, small caps (IWM -1.5%) are off more than the other major indexes.
- Doing their jobs are the low volatility ETFs like SPLV (SPLV) and USMV (USMV -0.2%), as well as defensive sectors like the utilities (XLU +0.6%).
- Raymond James' typically bullish Jeffrey Saut is out with a note calling for the first decent pullback of the year - a 10-12% decline - to commence later this month or early August, and he suggests investors begin raising cash.
- Biotech ETFs: XBI, BBH, FBT, PBE
- Low-vol ETFs: SPLV, LGLV, CFA, CFO
- Utility ETFs: XLU, IDU, VPU, UPW, FUTY, RYU, FXU, PUI, SDP, PSCU
Mon, Jun. 23, 11:35 AM
- The U.S. Supreme Court places some limits on the EPA program to deal with power plant and factory emissions of gases blamed for global warming, trimming the scope of the agency's permitting effort while still allowing some emissions regulations at larger facilities such as power plants.
- The Court says the EPA lacks authority in some cases to force companies to evaluate ways to reduce carbon dioxide emissions, but the decision does not affect EPA proposals for first-time national standards for new and existing power plants, and it preserves the EPA's authority over facilities that already emit pollutants the agency regulates other than greenhouse gases.
- Justice Scalia, writing for the court, says the ruling will allow the EPA to regulate 83% of all greenhouse gases emitted from plants nationwide vs. the 86% the agency had sought.
- ETFs: UNG, XLE, XLU, DGAZ, UGAZ, ERX, KOL, IDU, VDE, OIH, BOIL, GAZ, ERY, VPU, FCG, DIG, GASL, DUG, KOLD, IYE, UNL, GASX, NAGS, PXJ, FENY, RYE, UPW, RYU, FUTY, FXN, DCNG, FXU, DDG, SDP
Fri, Jun. 20, 9:52 AM| Comment!
XLU vs. ETF Alternatives
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