Utilities ETFs Keep Shining Bright

Following China's surprise decision to devalue the yuan, U.S. stocks are trading lower by about one percent Tuesday, wiping out Monday's impressive gains while reminding investors the third quarter has been turbulent to this point.

Increased volatility caused by events in international markets and the recent deterioration in previously high-flying sectors, namely biotech, sounds like a recipe for disaster, but utilities stocks and exchange traded funds are providing a familiar refuge for wary investors. Broadly speaking, U.S. stocks are a sea of red today, but the Utilities Select Sector SPDR XLU is higher by nearly two-thirds of a percent at this writing and trading at highest levels since June.

That brings XLU's third-quarter gain to 6.6 percent, or about 50 percent better than the second-best of the nine sector SPDRs over that period, the Consumer Staples Select Sector SPDR XLP.

“We’re impressed with the stronger-than-expected dividend increases announced by regulated utilities under our coverage over the past year, with a particular pickup in recent weeks/months. Despite ambitious capex plans, regulated utilities have boosted dividends by a median of 6.4% over the past year,” according to Macqaurie note posted by Barron's on Monday.

XLU is a well-known income investors destination. The ETF has a dividend yield of 3.47 percent, according to State Street data. That is about 135 basis points above where 10-year Treasury yields reside at this writing. And speaking of Treasury yields, despite some traders betting the odds of the Federal Reserve raising interest rates at its September meeting, 10-year yields are tumbling.

The yield on the benchmark U.S. government bond has plunged 12.5 percent over the past month, giving way to a 3.4 percent gain for XLU over the same span. XLU, the largest utilities ETF by assets, is the most rate-sensitive fund among the nine sector SPDRs. Falling Treasury yields serve another purpose for rate-sensitive fare such as utilities ETFs. While those falling yields mean higher prices, those lower yields also make the utilities sector's dividends more attractive.

In a note out Monday, MKM Partners endorsed a rate-sensitive pair trade that involves being long utilities and short real estate investment trusts (REITs). 

Followers of seasonal trends will enjoy noting that XLU is currently honoring its tradition of being one of the two best sector SPDRs (XLP is the other) in the month of August before September rolls around, a month in which XLU is historically the best of the nine SPDRs.

Investors appear to be betting on more upside for XLU. The ETF has added nearly $637 million in new assets since the start of the current quarter.