Utility stocks are often called “widow” and “orphan” stocks due to their smooth stock movements and stable dividends. Due to their relatively stable and predictable earnings, utilities become comparatively safe investment options. However, it should be noted that utility stocks have been more volatile so far this year compared to broader markets.
Since inception in 2017, the average implied volatility of the Utilities Select Sector ETF (XLU), which includes 30 stocks from the S&P 500 Utilities Index, was 12%. The SPDR S&P 500’s (SPX-INDEX) (SPY) implied volatility was 9.5%.
Why utilities weren’t stable
US utilities became more volatile in the last few years after interest rate normalization started gaining ground. In the last five years, XLU’s average implied volatility was 13%. During this period, broader markets’ average implied volatility was also 13%. If the Fed continues to aggressively hike interest rates, it might keep utility investors on their toes.
As we discussed earlier, higher interest rates make utility stocks less attractive. Generally, investors dump utility stocks and switch to bonds in pursuit of higher yields.
Utility stocks are more volatile
On July 5, 2017, NRG Energy (NRG), the most volatile stock among the S&P 500 Utilities Index, had an implied volatility of 40%. Its 15-day average implied volatility was 37%. NextEra Energy’s (NEE) implied volatility was 14%, which was marginally above its 15-day average. Duke Energy’s (DUK) implied volatility was 13%—marginally higher than its 15-day average implied volatility of 11%.
A fall in implied volatility is normally associated with a gain in the stock price, while a rise in implied volatility is normally associated with a fall in the stock price. When implied volatility increases, it usually indicates investors’ anxiety.