Why Utilities, Why UTES

Often considered a recessionary indicator, the U.S. Treasury yield curve remains inverted with the short end offering a yield of over 5.5% and the 10-Year Treasury note over 4.2%. The 3-month Treasury bill yield has moved to over 5.6% compared to a year ago at 2.41% and two years ago at 0.06%. This high yield environment is usually a headwind for utility stocks, and that has been true year-to-date, with the sector posting its worst first half performance relative to the S&P 500 Index in 35 years.


As of 8/25/23
Source: Bloomberg 

However, if interest rates do decline, the utility sector should be poised for positive returns. Since 1975 there have been 11 periods of falling rates as measured by the 10-Year U.S Treasury yield. During those periods utilities had a positive total return 9 of 11 times. Exceptions were the bear market at the beginning of the century after the dot-com bubble burst and the great financial crisis. During those same periods utilities beat the S&P 500 in 8 of the 11 periods. More recently, in the six falling rate periods since 2000, utilities outperformed the S&P 500 in five of six instances and were only slightly behind in the one period of underperformance.

2023.08 Why Utilities Why UTES-02*Yield on the U.S. 10-Year Treasury Note
Source Bloomberg 
 2023.08 Why Utilities Why UTES-03

The current narrative on the health of the U.S economy and the direction of interest rates continues to fluctuate. The Fed has raised interest rates by more than five percentage points over the past two years in an attempt to reign in the highest inflation the country has seen in decades. This rapid change in rate policy has seemingly been successful bringing Inflation closer to the Fed’s 2% target. The latest Consumer Price Index (CPI) data showed inflation has declined from over 9% in July of last year to 3.2% today. And the economy continues to grow. Last week’s 2Q Gross Domestic Product (GDP) report showed the country expanding at over 2.4% annually, albeit slightly lower than the prior quarter’s 2.6% result. Personal income data, however, showed wages grew at a slower pace than in the prior quarter, spurring questions as to the sustainability of GDP expansion going forward.

Chairman Powell cooled market sentiment that the Fed could cut rates this year at his latest press conference, stating “the process of getting inflation back down to 2% has a long way to go. Despite elevated inflation, longer term inflation expectations appear to remain well anchored.” At the same time Fitch downgraded the credit rating of the United States to AA+ from AAA, citing ballooning U.S debt load. The company expects the country to enter a recession by year end.

We believe clarity over the direction of interest rates and the health of the economy likely continues to be unclear. If investors believe we are at or close to peak rates then utilities, a defensive equity allocation with resilient fundamentals in all market cycles, may rally. At Reaves, we analyze utilities from the bottom-up, taking our cues from company fundamentals and regulatory environments to pick our best ideas. We consider the macroeconomic landscape when constructing portfolios but avoid making interest rate projections. Forecasting is extremely difficult to consistently get right, we prefer to focus on the stocks.

The trajectory of both earnings and dividend growth is one of the first factors we look at when building the portfolio of our actively managed Virtus Reaves Utilities EFT (UTES). Within the fund, earnings are expected to grow by nearly 9% this year. Dividend growth, an indicator we watch closely to assess management’s confidence in a company’s financial strength, has grown by 12.3% from this time last year. One holding, Constellation Energy Group (CEG), raised its dividend 100% in the period (excluding that outlier, UTES’ portfolio dividend growth is still over 7%).

2023.08 Why Utilities Why UTES-04Source: Bloomberg
*Excludes highest (Constellation Energy +100.0%) and lowest (PNM Resources -31.9%).

The Fund’s annualized return of 10.83% since its inception in 2015 is in line with the long-term potential returns we believe the utility sector can produce. The table below shows the performance of UTES as of 7/31/2023 versus its benchmark across a variety of time periods.

2023.08 Why Utilities Why UTES-05.2


To learn more about the Virtus Reaves Utilities ETF and the role an actively managed utilities fund can play in a diversified portfolio, please see the fund’s website

Performance data quoted represents past results. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate, so your shares, when redeemed, may be worth more or less than their original cost.

S&P 500® Utilities Index
The S&P 500® Utilities Index is a free-float market capitalization-weighted index comprised of companies included in the S&P 500® utilities sector. The index is calculated on a total return basis with dividends reinvested.

To see the most recent quarter-end performance and to learn more about the Virtus Reaves Utilities ETF UTES and the role an actively managed utilities ETF can play in a diversified portfolio, please see the fund’s website.


Important Additional Information:
Reaves Asset Management is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply any skill or training. Reaves is a privately held, independently owned “S” corporation organized under the laws of the State of Delaware.

The information provided in this blog does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. Investors should consider the investment objective, risks, charges and expenses of all investments carefully before investing. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur.

The 10-Year U.S. Treasury Note (UST) is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-Year U.S. Treasury Note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity. The U.S. government partially funds itself by issuing 10-Year U.S. Treasury Notes.

The S&P 500 Index (“S&P 500”) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The typical Reaves portfolio includes a significant percentage of assets that are also found in the S&P 500. However, Reaves’ portfolios are far less diversified, resulting in higher sector concentrations than found in the broad-based S&P 500.

The Dow Jones Utility Average aims to represent the stock performance of large, well-known U.S. companies within the utilities industry.

The Federal Reserve System is the central bank of the U.S. The Fed, as it is commonly known, regulates the U.S. monetary and financial system.

Past results do not guarantee future performance. Further, the investment return and principal value of an investment will fluctuate; thus, investor’s equity, when liquidated, may be worth more or less than the original cost. This document provides only impersonal advice and/or statistical data and is not intended to meet objectives or suitability requirements of any specific individual or account.
All investments involve risk, including loss of principal.
All data is presented in U.S. dollars.
Cash is cash and cash equivalents.
An investor cannot invest directly in an index. 
Important Tax Information: Reaves Asset Management and its employees are not in the business of providing tax or legal advice to taxpayers. Any such taxpayer should seek advice based on the taxpayer’s own individual circumstances from an independent tax adviser.
Fees: Net performance reflects the deduction of advisory fees which are described in detail in our Form ADV Part 2A. 

Please contact your financial professional, or click the following links, for a copy of Reaves’ Form ADV Part 2A and Form CRS.

Additional information about Reaves may be found on our website:  www.reavesam.com.

2023 © Reaves Asset Management (W. H. Reaves & Co., Inc.)

Risk Considerations: Exchange-Traded Funds (ETF): The value of an ETF may be more volatile than the underlying portfolio of securities it is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities. Equity Securities: The market price of equity securities may be adversely affected by financial market, industry, or issuer-specific events. Focus on a particular style or on small or medium-sized companies may enhance that risk. Utilities Sector Concentration: The fund’s investments are concentrated in the utilities sector and may present more risks than if the fund were broadly diversified over numerous sectors of the economy. Market Volatility: The value of the securities in the portfolio may go up or down in response to the prospects of individual companies and/or general economic conditions. Local, regional, or global events such as war or military conflict, terrorism, pandemic, or recession could impact the portfolio, including hampering the ability of the portfolio's manager(s) to invest its assets as intended. Prospectus: For additional information on risks, please see the fund’s prospectus.

Past performance is not a guarantee of future results. 

Please consider a Fund’s investment objectives, risks, charges, and expenses carefully before investing. For this and other information about any Virtus Fund, contact your financial professional, call 800-243-4361, or visit virtus.com for a prospectus or summary prospectus. Read it carefully before investing. 

Not insured by FDIC/NCUSIF or any federal government agency. No bank guarantee. Not a deposit. May lose value. 

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