Published on 10 May 2024 on Zacks via Yahoo Finance
Here's Why Utility ETFs Are Scaling New Highs
In the latest rally fueled by renewed hopes of rate cuts, the utility sector has been outperforming. The ultra-popular Utilities Select Sector SPDR XLU has risen in double digits since Apr 16 compared with 2.3% gains for the S&P 500 Index.This is especially true as the sector, which tends to outperform when the economy is in a downturn, is making the most of the current volatility and uncertainty triggered by the timing of the Fed rate cuts, slowing economy and geopolitical tension. No wonder most utility stocks and ETFs are hitting fresh highs. Utilities Select Sector SPDR (XLU), Vanguard Utilities ETF VPU, iShares U.S. Utilities ETF IDU, Fidelity MSCI Utilities Index ETF FUTY and Invesco Dorsey Wright Utilities Momentum ETF PUI are the popular funds that are hitting a series of new one-year highs in the recent trading sessions. These products carry a Zacks ETF Rank #3 (Hold) (see: all the Utilities ETFs here).Here, we discuss some strong reasons for the outperformance of the sector and ETFs. These factors are likely to fuel the rally in the coming weeks as well:
Defensive Investment
Being a low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or safe haven amid economic or political turmoil (read: Beyond "Big Six:" Why Choose Non-Cyclical Sector ETFs?).The world's largest economy is showing signs of a slowdown, thus raising bets for defensive investments. The economy added a lower-than-expected 175,000 jobs last month, and the unemployment rate unexpectedly jumped to 3.9%. After growing for 15 consecutive months, U.S. service sector activity also unexpectedly contracted in April. In another recent weak data, consumer confidence dropped last month to the lowest since mid-2022. Additionally, the United States had a weak start to the year due to lower consumer and government spending amid growing inflation. The economy expanded at the slowest pace in two years, with GDP rising 1.6% annually in the first quarter.