On October 25 the Bank of Canada elected to hold interest rates at 1% citing concerns over Canadian debt, housing, and ongoing NAFTA negotiations which have taken a bad turn. Bank of Canada governor Stephen Poloz is emphasizing caution heading into 2018. Slowing domestic growth and problems with NAFTA could see the tightening period dramatically extended, if not halted entirely if the market reacts violently to bad news.
The iShares S&P/TSX Capped Utilities Index Fund (TSX:XUT) is an attractive option in a low interest rate environment. Utilities tend to perform well when interest rates are low with a high dividend-yield that often outperforms traditional income investments. Low borrowing costs are also helpful to companies, particularly in North American where both U.S. and Canadian governments are desperate to kick star new infrastructure projects.
The iShares Capped Utilities ETF has increased 7.2% in 2017 and 4.9% year over year. Its top holdings include Fortis Inc., Emera Inc., and Hydro One Ltd. Fortis illustrates the potential for income growth over a long period of time. The company has delivered consecutive years of dividend-growth for over 4 decades.
Most of the utilities in this fund boast a wide economic moat that provide stability and consistent income for investors. A dovish position from the Bank of Canada that could very well extend into mid-2018 and beyond should pique the interest of investors who may be willing to dive back into this sector.