The Strategist

Is it worth investing in S&P 500 Utilities?

12/03/2018 - 14:19

The S&P 500 Utilities sector showed the best results during the fall of the market. This is not surprising: traditionally, the utility sector becomes a “safe haven” in times of uncertainty in the financial market. It is interesting how dynamics of companies in this sector have improved over time.

Walter Baxter
Walter Baxter
Since the end of September, the S&P 500 index has fallen by 8% (including dividend reinvestment), while the S&P 500 Utilities sector has grown by 3.3%.

The sector delivered the best results, while papers of companies from most other sectors fell, showing a negative trend. The overall profitability of the utility sector exceeds that of the S&P 500 as a whole, with the exception of only one period of 10 years.

But here there are some nuances. It is important to remember what happened before the start of this ten-year period. In two years, the S&P 500 fell by 34% (including dividend reinvestment), while the utility sector suffered a much milder decline of 13%. 

A period of 20 years shows that the dynamics of the utilities sector are, for the most part, much better than the S&P 500 as a whole.

There is no doubt that over the past five years, the information technology sector led by giants of the FAANG group (Facebook, Apple, Amazon, Netflix and Alphabet, the parent company of Google) has become a favorite place of investors. But, despite the rapid growth of companies, since the end of September, the FAANG results have been even worse than the entire S&P 500 index.

Profitability of the public sector for 15 and 20 years shows its importance: such companies are less susceptible to crises because of the need and indispensability of the products they produce. A good state of affairs in the utilities industry is also facilitated by a benevolent attitude from the government. Also important is the fact that shares of public utilities give a high dividend yield.

Those who want to start investing in the utility sector should remember about importance of diversification and not put all the money only in the shares of one company. For example, PG & E shares for the current year fell by 47%. Investors are concerned that the company may be held accountable for California forest fires. But some investors see the decline as an opportunity to buy cheap papers and get a good profit in the future.