Utility ETF Soars as Hot Money Shifts to Safe Havens

Utility ETF Soars as Hot Money Shifts to Safe Havens

President Trump’s trade war against China isn’t hurting all stocks. Just look at the price action in a key safe haven.

The SPDR Utilities ETF (XLU) is up 2.5 percent in the last week, while the broader S&P 500 is down almost 2 percent. Aside from real-estate investment trusts, utilities are the only major sector with a positive return over that time frame.

Several forces seem to be happening simultaneously. The result is a river of money suddenly flowing into a corner of the market typically ignored by many investors.

First, fear in general can be good for utilities because they have stable businesses and pay dividends. They weather recessions better than economically sensitive stocks like industrials or semiconductors.

But a lot more is going on than just fear. After all, no one’s seriously expecting a recession anytime soon. The two other key issues are interest rates and business exposure to China.

SPDR Utilities ETF (XLU) chart highlighting price action at key $57 level.
SPDR Utilities ETF (XLU) chart highlighting price action at key $57 level.

The Interest Rate Effect

Because they’re viewed as income stocks, utilities usually benefit from lower interest rates. Investors accept lower dividend yields when rates are lower, which in turn makes them willing to pay higher stock prices.

And, in case you missed it, rates plunged yesterday. The yield on the 30-year Treasury bond fell to its lowest level in over a year after Washington and Beijing kept trading barbs. There were also dovish minutes from the last Federal Reserve meeting.

What else do utilities have going for them? Pretty much no China exposure, that’s what. Don’t forget that plenty of big investors have billions of dollars in companies like Apple (AAPL) and Nvidia (NVDA), whose businesses are intertwined with the Middle Kingdom.

For years, that presence was viewed as a growth opportunity. But now money managers are starting to think the current dispute may not only continue, but worsen. Their response is to find new asset classes with little or no footprint in Asia. Utilities fit that bill.

XLU’s Main Holdings

Here’s a breakdown of the five largest holdings in XLU:

  1. NextEra Energy (NEE): The world’s biggest utility company provides electricity in Florida. It also has nuclear plants, wind farms and solar installations across the U.S.
  2. Duke Energy (DUK): Named after the same man as the university (James Buchanan Duke), DUK operates across the Carolinas, Florida and parts of the Midwest. It has nuclear and coal-fired plants, along with a handful of solar farms.
  3. Dominion Energy (D): The Richmond, Virginia-based utility has a toehold in fast-growing states like Utah and Idaho.
  4. Southern (SO): The Atlanta-based firm is mainly focused on Georgia and Alabama. It’s also more active for options traders, averaging about 7,000 contracts per day.
  5. Exelon (EXC): The Chicago-based company owns Commonwealth Edison and is the largest nuclear-power generator in the U.S.

Finally, XLU recently bounced at $57 — its peak in both 2017 and 2018. Chart watchers could interpret that as a bullish sign, with old resistance becoming support.

In conclusion, money is always going somewhere in the stock market. Many investors have historically favored the growth potential of technology firms. But now as bigger conditions change (geopolitics and interest rates), a new rotation may be occurring into utility stocks.

This post is part of our regular “ETF of the week” series. It focuses on exchange-traded funds with interesting news or price changes.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.