It has been a chilly month of August for Utilities stocks. After peaking on July 30 at 38.23 on the Utilities Select Sector SPDR (XLU), the sector has declined by -4.7%. This performance strikes a stark contrast to the broader stock market, which is up +2.5% over the same time period as measured by the S&P 500.
Since the outbreak of the financial crisis several years ago, Utilities stocks have played a meaningful role in core portfolio strategies. This is due to the fact that unlike most sectors in the stock market, Utilities shares tend to travel their own path and with far less volatility.
As a result, the recent pullback in Utilities stocks has provided an attractive entry point to reestablish positions in the sector. Not only do Utilities provide a lower risk way to capture stock market gains associated the potential for more balance sheet expanding monetary stimulus from global central banks, but they also provide downside protection in the event of another outbreak in volatility for the broader market. Moreover, the XLU in particular offers an attractive 3.8% yield that provides a 120 basis point premium over the 10-Year U.S. Treasury yield. Lastly, because Utilities stocks have shown the propensity to behave independently of other asset classes including the broader stock market, an exposure to the sector also helps enhance overall portfolio diversification.
For these reasons, positions in the XLU were reestablished to portfolios on Monday, August 27 following the most recent pullback.