Home etftrends.com Despite Recent Underperformance, Utilities Could Rebound

Despite Recent Underperformance, Utilities Could Rebound

With big tech leading the current market rally, a risk-on sentiment fueled by the anticipation of rate cuts may have pushed safe haven sectors like utilities in the background. That said, a rebound could be underway that could potentially push utilities higher.

The energy sector may be experiencing a fork in the road as the push to reduce carbon emissions could mean fossil fuels falling to the wayside while being supplanted by alternative energy sources. As the path to sustainable energy becomes even more evident, utilities can benefit from this energy transition.

“For the first time in a generation, many utilities have pathways to earnings and dividend growth that could last a decade or more,” said Morningstar energy and utilities strategist Travis Miller. “The energy transition is picking up pace, clean energy targets are drawing near, and new data centers are sucking electricity. Utilities are planning for a surge of infrastructure investment to make the energy grid safer, more efficient, more reliable, and cleaner.”

Capital Investment Required to Thrive

As the Morningstar report mentioned, the utilities industry can get mired in the proverbial bureaucratic red tape given that its highly regulated. Thus, it will require the necessary capital investment backed by governmental authorities in order to thrive.

“Utilities must earn support for new infrastructure investment even if it means higher energy costs,” Miller added. “The utilities that can prove customer benefits through the energy transition will be able to reward shareholders with earnings and impressive dividend growth.”

In a chart with a three-year time frame, the S&P 500 Utilities Sector was pushing above the broad S&P 500 index during the 2022 downtrend, proving that utilities were an ideal safe haven amid rate hikes. In 2024, the broader index has now pushed past utilities, but if that trend reverses once again, there are bullish opportunities available.

^SPXUSTR data by YCharts

3x Leveraging Utilities

Traders looking to add leverage to the utilities sector can take a look at the Direxion Daily Utilities Bull 3X Shares (UTSL). That extra juice from the triple exposure could amplify profits should the utilities sector follow the broader S&P index higher.

UTSL seeks daily investment results equal to 300% of the daily performance of the Utilities Select Sector Index. The index includes companies from the utilities sector that includes the following industries: electric utilities; multi-utilities; water utilities; independent power producers and energy trades; and gas utilities.

For more news, information, and analysis, visit the Leveraged & Inverse Channel.

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