From Zacks Research: The recently released weak economic data, which also includes lower-than-expected jobs report, played a major role in reducing rate hike chances. This in turn boosted the debt-dependent utility sector. Like the stocks, ETFs with significant exposure to this sector also gained from this favorable scenario.
Weak Data Lowers Rate Hike Chances
Weaker-than-expected August jobs data, the ISM Manufacturing Index and ISM Services index lowered rate hike possibilities. The August non-farm payroll reading of 151,000 was below the estimated 180,000 and the upwardly revised prior-month reading of 275,000. The August job number was the lowest in four months. Average hourly earnings on private nonfarm payrolls grew only 0.1%, witnessing the weakest pace of growth since March. Also, the average work week of 34.3 hours was the lowest in more than two years (read: August Job Data Muddles Fed Rate Hike Chance: ETFs to Buy).
Separately, the ISM Manufacturing Index dropped to 49.4 in August from 52.6 in July, indicating that manufacturing sector contracted last month . In fact, the index entered the zone for the first time since February. Meanwhile, ISM Services index fell from 55.5% in July to 51.4% in August. Though the reading showed that the sector expanded last month, the pace of growth significantly declined. Non-manufacturing activity posted its slowest growth since early 2010.
While it is almost clear that the Fed will not opt for policy tightening in this month’s policy meeting, the possibility of a hike in December is also bleak. The FedWatch Tool of CME Group currently shows that the probability of a December hike, of which investors were almost sure even a month ago, has declined by a large extent to only around 40% (read: ETF Winners Following Fed Minutes).
Utility Sector Poised to Gain
The utility sector, which is a rate-sensitive one and is expected to perform well in a low rate environment, is likely to benefit from this reduced rate hike chances in the near term. The sector suffered significantly last month after comments from Fed officials indicated a rate hike. However, its fortunes took a reverse turn since the start of this month on the back of declining rate hike possibilities.
Companies from this sector require significant amount of debt to carry on their expenditures and thus are poised to gain from a low-rate environment. Moreover, utility is considered to be one of the safe haven sectors as the regulated nature of the businesses gives their revenues a high level of certainty. These companies also have the potential to provide consistent dividend payments, which make them more attractive to investors (read: Utility ETFs Always a Safe Option for the Investors).
3 Utility ETFs in Focus
Banking on this encouraging backdrop, we have highlighted three utility ETFs that have gained significantly in recent times and are poised to benefit further with diminishing rate hike possibilities. These ETFs have Zacks ETF Rank #3 (Hold) with a medium risk outlook and provide impressive dividend yields.
XLU is one of the most popular and widely traded utility ETFs. The main purpose of this fund is to provide investment results that correspond to the performance of the Utilities Select Sector Index. The fund has an asset base of nearly $7.9 billion. This fund holds 30 stocks and the top 10 companies occupy nearly 60% share of the total net assets. The ETF sees a solid average daily volume of more than 14 million shares. Sector-wise, XLU is heavy on electric utilities (62.4%) followed by multi-utilities (33.2%). The fund has a dividend yield of 3.27% and an expense ratio of 0.14%. The fund has gained 2.8% over the past five trading sessions.
This ETF aims to follow the performance of the MSCI US Investable Market Utilities Index. Presently, this fund manages an asset base of $2.3 billion. This fund has an average daily volume of around 283,000. It holds 80 stocks and is inclined toward the top 10 companies as 49.3% of the total net assets are invested in them. The fund has a dividend yield of 3.05% and an expense ratio of 0.10%. The fund has returned 2.5% over the past five trading sessions (read:ETFs to Watch as Fed Members Indicate Rate Hike in September).
FXU seeks investment results that correspond generally to the price and yield of the StrataQuant Utilities Index. The fund manages an asset base of $1.7 billion and sees impressive average daily volume of around 683,000. The product holds 41 stocks in total in its basket, with the top 10 companies comprising 41.5% of total net assets. Sector-wise, FXU is heavy on electric utilities (42%) followed by diversified telecom services (23.3%), multi-utilities (16%) and wireless telecom services (13.7%). The fund has a dividend yield of 2.72% and an expense ratio of 0.66%. The ETF has gained 2.5% over the past five trading sessions.
This article is brought to you courtesy of Zacks Research.