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Oct. 8, 2019, 10:11 a.m. EDT

The hottest stock-market sector in the past year beats technology and real estate

Utility stocks have not only soared during the past 12 months, they have also measured up well over the long haul

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By Philip van Doorn, MarketWatch


Duke Energy
Duke Energy's Citrus Combined Cycle Station 1, part of the Crystal River Energy Complex on Florida's Gulf Coast. The company’s shares have a dividend yield of 3.93%.

It may not surprise you that utility stocks have fared well as interest rates have declined, but a closer look at the sector may genuinely shock you.

As discussed when we reviewed the best-performing stocks of 2019, the utilities sector of the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.0073%  was the benchmark index’s top performer in the third quarter. But a closer look at 12-month total returns for the sectors, the full index and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.01% is enlightening, and so are the longer-term figures.

Here’s how the sectors and the broad indexes have performed during 2019, for 12 months and for longer periods:

S&P 500 Sector Total return - 2019 through Oct. 1 Total return - 12 months Total return - 3 years Total return - 5 years Total return - 10 years Total return - 15 years Total return - 20 years
Information Technology 30.3% 7.1% 82% 133% 395% 461% 187%
Real Estate 28.4% 24.5% 33% 71% 310% 284% N/A
Utilities 25.0% 27.1% 46% 82% 230% 351% 357%
Consumer Staples 22.9% 16.6% 25% 56% 221% 325% 427%
Consumer Discretionary 21.5% 1.8% 54% 94% 417% 371% 383%
Communications Services 20.6% 4.8% 9% 29% 149% 166% 25%
Industrials 19.6% -1.9% 35% 58% 253% 234% 290%
Financials 17.1% 1.4% 51% 63% 185% 62% 138%
Materials 14.4% -0.7% 27% 30% 146% 191% 289%
Health Care 4.6% -5.0% 31% 54% 280% 305% 339%
Energy 3.6% -22.2% -10% -23% 39% 116% 222%
 
S&P 500 Index 19.1% 2.6% 44% 67% 252% 255% 237%
Dow Jones Industrial Average 16.0% 2.1% 56% 79% 259% 281% 316%
 Source: FactSet

(All returns in this article include reinvested dividends.)

Look at the bottom of the table. The 12-month returns have been paltry. This year’s euphoria is really only a recovery from the doldrums of the fourth quarter of 2018, when the S&P 500 was down 13.5% and the Dow was down 12%. If the period had closed on Christmas Eve, the S&P 500 would have been down 19% for the fourth quarter, and the Dow down 18%.

So the 12-month figures are more meaningful. It is understandable that the utilities and real estate sectors — considered dividend-income investments — have fared well as the yield on 10-year U.S. Treasury notes /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -3.53%  has declined to 1.59% from 3.05%.

Here’s how the utilities sector’s returns have ranked against the others for all the periods:

Total return period Utilities sector rank
2019 through Oct. 1 3
12 months 1
3 years 4
5 years 3
10 years 6
15 years 3
20 years 3
Data source: FactSet

This “boring” sector has measured up well — it’s worst ranking is sixth for 10 years, a period during which big tech companies have performed very well, taking the market-capitalization-weighted S&P 500 along with it. But the utilities sector has been ranked in the top half for all other periods and third for 15 and 20 years.

And it is possible, even likely, that interest rates will head even lower. The Federal Reserve is under pressure to lower short-term interest rates further as economic reports show a slowdown in growth, and the central bank may take other steps to push interest rates lower, as central banks in other developed economies have done.

For example, Germany’s 10-year government bond /zigman2/quotes/211347112/realtime BX:TMBMKDE-10Y -7.97% now yields minus 0.55%.

Exchange-traded funds that track the S&P 500 utilities sector include the Utilities Select Sector SPDR ETF /zigman2/quotes/206645117/composite XLU +0.78% , which does so on a market-cap-weighted basis with low annual expenses of 0.13% of assets. The Invesco S&P 500 Equal Weight Utilities ETF /zigman2/quotes/207949875/composite RYU +0.88%  has an annual expense ratio of 0.40%.

Two examples of utility ETFs that take a broader approach with very low expenses are the Fidelity MSCI Utilities Index /zigman2/quotes/208243544/composite FUTY +0.70% , which has an expense ratio of 0.08%, and the Vanguard Utilities ETF /zigman2/quotes/201635887/composite VPU +0.84% , with expenses of 0.10%.

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