The Utilities Sector Today


You think of an old, reliable, high dividend sector when you hear ‘Utilities’. But that is not as much the case nowadays. Utilities in 2020 are dominated by firms that invest heavily in green and renewable energy to meet the needs and wants of investors and consumers. The largest holding in the Select Sector SPDR Utilities ETF is NextEra (NEE). NextEra is a whopping 14% of the entire U.S. Utilities arena. The top 4 holdings are 38% of the index.

XLU has performed very well in the last several years as interest rates have declined. Believe it or not, Utilities are beating the overall U.S. stock market. XLU has compounded at 10.2% over the last 5 years versus 8.8% for SPY.

The dividend yield is thought of as a key barometer of an ETF’s stability. It can be more important to look at total shareholder yield, however. Shareholder yield is comprised of the dividend yield and the buyback yield. Utilities feature the lowest total shareholder yield of all 11 stock market sectors last year, according to JP Morgan. Why so low? Utilities were net-issuers of equity in the last 12 months while other sectors were busy buying back their stock.

No sector analysis is complete without reviewing factor exposure. So much of total return is factor-driven, meaning how much exposure does the asset have to growth vs. value? Momentum? Quality? Size? The Utilities sector is actually more growth-oriented than other sector ETFs according to Morningstar. The momentum factor is also relatively high for those ‘boring’ Utilities. Recall that growth and momentum factors have done quite well in the last 5 years.

Here’s the point – have a discerning eye when reviewing sectors as they are constantly in flux. Also be sure to review factor exposure to see what may be driving returns. Be a data-drive, evidenced-based investor. Don’t be an investor who goes with the usual, often outdated, Wall Street narrative.