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ETF Specialist

Tread Cautiously in the Overvalued Utilities Sector

But this low-cost ETF has held up as interest rates have stayed low.

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Utilities companies have made up significant ground this year after trailing the broader U.S. equity market by a wide margin in 2013. A broad utilities-oriented exchange-traded fund,  Vanguard Utilities ETF (VPU), has returned 14.5% year to date, versus the S&P 500 Index's 7.7% return during the same interval.

Utilities companies' fundamentals have remained strong. Most utilities have strengthened their earnings profiles and balance sheets by taking advantage of low-cost borrowing and rich market prices. The utilities sector's average dividend yield remains near 4%, which is nearly double the market's average yield and some 130 basis points above the 10-year U.S. Treasury yield. We see no wholesale threats to dividends across the sector. Not surprisingly, investors in utilities companies keep a close eye on interest rates. With Treasuries remaining near record lows, investors have rewarded utilities companies.

Robert Goldsborough does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.