Useful Utilities

Labor Day has come and gone, but utility fund shareholders are hoping that, Fed willing, the summer never ends.

Recent months have been anything but cruel to utility funds. According to fund-tracker Morningstar, the average fund is up 7.6% since the start of June, more than double the rise in the S&P 500. The spike in utility share prices has also lifted the average fund's year-to-date return to 14.5% -- second only to real estate funds in performance among those ranked by Morningstar.

The source of the sector's surge is not hard to pinpoint. Utility fund portfolio managers readily attribute most of their summer success to declining interest rates and a benign Federal Reserve rate stance. The Fed paused its rate-hiking campaign at its August meeting.

The yield on the benchmark Treasury bond has fallen to 4.8% from 5.1% over the past three months on the hope that a slowing economy will keep the Fed on the sidelines. Meanwhile, the odds of a rate cut at the Fed's January meeting have risen to 14%, up from nil at the start of June, according to Miller Tabak.

Utility companies generally offer high dividend yields, which become attractive to investors when Treasury yields drop. The major power producers also tend to be big borrowers and benefit greatly when the cost of capital declines.