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Why Investors Flocked to Utilities amid Broader Market Turmoil

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Nov. 20 2020, Updated 1:48 p.m. ET

Utilities stayed strong

The slow-and-steady utilities sector was the top performer yesterday when the broader markets fell ~3%, losing their 2018 gains. The Utilities Select Sector SPDR ETF (XLU), a representative of the S&P 500 Utilities, rose 2.4% on October 24. Investors tend to turn to safer utilities amid broader market tensions. Utilities tend to have higher dividend yields and stable stock price movements.

So far this year, utilities at large have gained ~5%, while the broader markets have fallen 0.6%. Utilities, a sector that is vulnerable to higher interest rates, has gained ~7% since the Fed’s last rate hike in September.

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Will the strength continue?

Among the S&P 500 Utilities, DTE Energy Holding (DTE) stock was the top gainer on October 24, rising ~5%. Utility giants NextEra Energy (NEE) and Duke Energy (DUK) both rose 3%. Regulated utility Southern Company (SO), one of the laggards among the top utilities, also rose ~3% yesterday.

XLU’s simple moving average levels are strong, given the premium to its support levels. However, XLU’s recent rise pushed it into an overbought zone, with an RSI (relative strength index) of 70. Extreme RSI values could suggest an impending reversal in a stock’s direction.

Utilities currently have an average yield of 3.3%, which is higher than the broader markets. Southern Company and PPL Corporation (PPL) offer even higher yields of 5.4% each. To find out more, read SO and PPL: How These Top-Yielding Utilities Stack Up.

With the broader markets expected to remain unstable amid geopolitical tensions, utilities could be an attractive option for investors. Their slow-but-steady earnings and higher dividend growth for the next few years might be alluring from the total return perspective.

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