One of the stock market’s bright spots is the utilities sector, which is still sporting green in a sea of red.
While the SPDR S&P 500 ETF Trust (SPY) is up slightly for the year, the utilities sector is one of only two areas of the market to show gains in October, aside from consumer staples.
Year-to-date, the Utilities Select Sector SPDR Fund (XLU) is up 4.5 percent versus the 2.7 percent gain for SPY. Until the recent market retreat, the utilities sector was trailing the broader market. Looking at a chart, utilities (along with the broader market) made their low for the year in February, but when the broader market rebounded utilities generally held in a sideways pattern until June, when most utilities started to gently move higher.
Although utilities dipped in mid-October, this defensive sector rebounded when most other sectors fell.
So what’s behind the utilities sector action? There’s no clear-cut answer, notes Brett Manning, senior market analyst at Briefing.com. “The performance is a bit of a mystery,” he says.
Given that only defensive sectors like utilities and consumer staples are higher right now, there could be a bit of a fear trade or a sector rotation going on, he says.
“If you have to be in equities, investors may be looking for whatever seems the safest,” Manning says.
John Bartlett, co-portfolio manager of the actively managed Reaves Utilities ETF (UTES), says in addition to a fear trade, factor investing may be also be a reason why utilities are doing well. The low-volatility factor tends to overweight utilities, and that’s been a tailwind this year, he adds.
UTES has a 95 basis-point expense ratio and is up 6.3 percent this year. The one-year return is 4.2 percent and the three-year return is 12.2 percent. It has $13.5 million in assets under management.
Valuations for utilities look cheap versus the rest of the market. The price-to-earnings ratio for the sector is around 16 times earnings, compared to 21.8 for the S&P 500, 23.3 for the Nasdaq 100 and 46.8 for the Russell 2000. Utilities valuations are down from about 20 times earnings, which the sector sported at its November 2017 highs. That said, it’s still a bit rich historically, Manning says.