With market sentiment broadly reflecting a pessimistic outlook toward utilities in today’s rising interest rate environment, it makes sense that many investors may want to steer clear of utilities stock in general.
Rising rates are, of course, a major negative catalyst for the broader utilities sector, as utilities tend to be highly negatively correlated with interest rates. Carrying similar characteristics to bonds, as rates rise, investors tend to pile their money into securities which have been reduced in price relative to a rising yield.
That said, the utilities sector does differ in one major way from bonds; namely, the fact that utilities stocks are exactly that – stocks (equities). Having the ability to garner capital appreciation in addition to a dividend yield is something many long-term investors want exposure to, and assuming rates will not rise substantially (less than 100 basis points over the next couple years), utilities stocks should outperform their yield-bearing peers in the near to medium term.
For many utilities companies with impressive growth profiles, rising rates can mean reduced mid to long-term expected growth rates; as rates rise, the cost of borrowing (via bonds or otherwise) will rise in lockstep. To smooth out the cyclicality of many utilities companies as well as some capital structure concerns investors may have with picking individual stocks, one exchange traded fund (ETF) which may hit all the boxes for investors is the Utilities Select Sector SPDR ETF.
Invest wisely, my friends.
