Market Overview

Make A Boring Sector Glamorous With This ETF

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With stocks back to record heights, it's easy to overlook boring sectors such as utilities. However, the typically staid group is perking.

What Happened

The Direxion Daily Utilities Bull 3X Shares (NYSE: UTSL) is the dominant force among leveraged utilities exchange-traded funds. UTSL attempts to deliver triple the daily returns of the Utilities Select Sector Index.

UTSL is worth considering over the near-term for at least two reasons. First, the utilities sector is catching a bid as stocks rebound and investors ponder from where to source income. Second, utilities aren't all the way back to all-time highs as are some sexier sectors.

Why It's Important

There are some other fundamental factors supporting the case for UTSL, including the fact that utilities aren't as pricey as usual.

“The past three months prove investors should heed valuation signals, even for utilities,” said Morningstar in a recent note. “Since we warned of record-high utilities valuations in late February, the Morningstar U.S. Utilities Index is down 15%, trailing the S&P 500 (down 8%). U.S. utilities are now in line with our fair value estimates. With interest rates still low, investors might find dividend yields attractive.”

Another source of allure is that while utilities aren't seen through the growth lens, the sector is making investments needed to generate growth.

“We forecast $656 billion of capital expenditures over the next five years for the U.S. utilities we cover, more bullish than consensus and up from $541 billion during the past five years,” said Morningstar. “This capital investment supports our median 5.5% earnings growth and 6.5% dividend growth forecasts through 2024.”

What's Next

If broader benchmarks continue climbing higher, it's reasonable to expect that utilities will follow suit, but gains will be subdued. That means for near-term traders, UTSL is the idea avenue for juicing short-term gains in a usually staid sector.

Plus, the renewable energy boom, which can generate segment-moving headlines, is another potential catalyst for UTSL.

“Growth and income investors will benefit from owning companies that invest in renewable energy and supporting infrastructure during the next 5-10 years,” notes Morningstar. “Utilities have substantial ground to cover to meet public policy targets and corporate demand.”

 

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