The S&P 500 utilities sector has been the best performer during the market decline that began in October. Don’t roll your eyes.
We know it may not be a surprise, as utility companies offer investors a haven in times of turbulence. But what may interest you is how much better this stodgy sector’s performance has been over long periods.
From the end of September, the S&P 500 Index (.SPX), has declined 8%, including reinvested dividends, while the S&P 500 utilities sector returned a positive 3.3%. Here’s a chart showing how well the 12 sectors of the S&P 500 Index have fared over various periods:
The S&P 500 utilities sector has been the best during the post-September market turmoil and has ranked second for 2018 through Nov. 26. But if you look at the longer periods, the total returns exceed those of the entire S&P 500 for all periods except for 10 years.
But that 10-year figure is a bit deceptive. You need to consider what occurred before this 10-year period began. The S&P 500 was down 34% (including reinvested dividends) for two years through Nov. 26, 2008, while the utilities sector suffered a far milder 13% decline.
The 20-year chart shows that, for the most part, the utilities sector has had less “downside capture” than the index:
There’s no question that over the past five years, the information-technology sector, driven by the market-cap-weighted performance of the FAANG companies (Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOG) ), has been the place to be. But the FAANG stocks have all fared even worse than the S&P 500 since the end of September, despite the companies’ fast growth.
The 15-year and 20-year returns give evidence to the importance of the utilities sector: People and companies need those services in what is a critical industry protected by regulators. Utilities also reward investors with steady dividend payouts.
Investing in utility stocks Concentrating on individual stocks can be a risky endeavor. Shares of PG&E Corp. (PCG), the owner of Pacific Gas and Electric Co., are down 47% for 2018. Investors have worried that the company may be held liable for the California wildfires. Then again, some investors have looked at the decline as an opportunity.
Regardless of how the PG&E saga plays out, there’s no question that a safer way for investors to gain exposure to the utilities sector is through an exchange traded fund, such as the Utilities Select Sector SPDR ETF (XLU), the Vanguard Utilities ETF (VPU), or the iShares U.S. Utilities ETF (IDU).
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