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The hottest stock-market sector in the past year beats technology and real estate

By Philip van Doorn, MarketWatch

Utility stocks have not only soared during the past 12 months, they have also measured up well over the long haul

It may not surprise you that utility stocks have fared well as interest rates have declined, but a closer look at the sector may genuinely shock you.

As discussed when we reviewed the best-performing stocks of 2019 (link), the utilities sector of the S&P 500 was the benchmark index's top performer in the third quarter. But a closer look at 12-month total returns for the sectors, the full index and the Dow Jones Industrial Average is enlightening, and so are the longer-term figures.

Here's how the sectors and the broad indexes have performed during 2019, for 12 months and for longer periods:

S&P 500 Sector                Total return - 2019 through Oct. 1  Total return - 12 months  Total return - 3 years  Total return - 5 years  Total return - 10 years  Total return - 15 years  Total return - 20 years 
Information Technology                                     30.3%                      7.1%                     82%                    133%                     395%                     461%                     187% 
Real Estate                                                28.4%                     24.5%                     33%                     71%                     310%                     284%                      N/A 
Utilities                                                  25.0%                     27.1%                     46%                     82%                     230%                     351%                     357% 
Consumer Staples                                           22.9%                     16.6%                     25%                     56%                     221%                     325%                     427% 
Consumer Discretionary                                     21.5%                      1.8%                     54%                     94%                     417%                     371%                     383% 
Communications Services                                    20.6%                      4.8%                      9%                     29%                     149%                     166%                      25% 
Industrials                                                19.6%                     -1.9%                     35%                     58%                     253%                     234%                     290% 
Financials                                                 17.1%                      1.4%                     51%                     63%                     185%                      62%                     138% 
Materials                                                  14.4%                     -0.7%                     27%                     30%                     146%                     191%                     289% 
Health Care                                                 4.6%                     -5.0%                     31%                     54%                     280%                     305%                     339% 
Energy                                                      3.6%                    -22.2%                    -10%                    -23%                      39%                     116%                     222% 
 
S&P 500 Index                                              19.1%                      2.6%                     44%                     67%                     252%                     255%                     237% 
Dow Jones Industrial Average                               16.0%                      2.1%                     56%                     79%                     259%                     281%                     316% 
                                                                                                                                                                                                      Source: FactSet 

(All returns in this article include reinvested dividends.)

Look at the bottom of the table. The 12-month returns have been paltry. This year's euphoria is really only a recovery from the doldrums of the fourth quarter of 2018, when the S&P 500 was down 13.5% and the Dow was down 12%. If the period had closed on Christmas Eve, the S&P 500 would have been down 19% for the fourth quarter, and the Dow down 18%.

So the 12-month figures are more meaningful. It is understandable that the utilities and real estate sectors -- considered dividend-income investments -- have fared well as the yield on 10-year U.S. Treasury notes has declined to 1.59% from 3.05%.

Here's how the utilities sector's returns have ranked against the others for all the periods:

Total return period  Utilities sector rank 
2019 through Oct. 1  3 
12 months            1 
3 years              4 
5 years              3 
10 years             6 
15 years             3 
20 years             3 
                      Data source: FactSet 

This "boring" sector has measured up well -- it's worst ranking is sixth for 10 years, a period during which big tech companies have performed very well, taking the market-capitalization-weighted S&P 500 along with it. But the utilities sector has been ranked in the top half for all other periods and third for 15 and 20 years.

And it is possible, even likely, that interest rates will head even lower. The Federal Reserve is under pressure to lower short-term interest rates further as economic reports show a slowdown in growth, and the central bank may take other steps to push interest rates lower, as central banks in other developed economies have done.

For example, Germany's 10-year government bond now yields minus 0.55%.

Exchange-traded funds that track the S&P 500 utilities sector include the Utilities Select Sector SPDR ETF (XLU), which does so on a market-cap-weighted basis with low annual expenses of 0.13% of assets. The Invesco S&P 500 Equal Weight Utilities ETF (RYU) has an annual expense ratio of 0.40%.

Two examples of utility ETFs that take a broader approach with very low expenses are the Fidelity MSCI Utilities Index (FUTY), which has an expense ratio of 0.08%, and the Vanguard Utilities ETF (VPU), with expenses of 0.10%.

A list of the entire sector

Here are the 28 stocks that comprise the S&P 500 utilities sector, sorted by dividend yield:

Company                               Ticker  City          State           Dividend yield 
PPL Corp.                             US:PPL  Allentown     Pennsylvania             5.27% 
Dominion Energy Inc.                  US:D  Richmond      Virginia                 4.52% 
Southern Co.                          US:SO  Atlanta       Georgia                  4.01% 
Duke Energy Corp.                     US:DUK  Charlotte     North Carolina           3.93% 
CenterPoint Energy Inc.               US:CNP  Houston       Texas                    3.85% 
AES Corp.                             US:AES  Arlington     Virginia                 3.36% 
Edison International                  US:EIX  Rosemead      California               3.32% 
FirstEnergy Corp.                     US:FE  Akron         Ohio                     3.17% 
Consolidated Edison Inc.              US:ED  New York      New York                 3.15% 
Entergy Corp.                         US:ETR  New Orleans   Louisiana                3.10% 
Public Service Enterprise Group Inc.  US:PEG  Newark        New Jersey               3.05% 
Pinnacle West Capital Corp.           US:PNW  Phoenix       Arizona                  3.03% 
Exelon Corp.                          US:EXC  Chicago       Illinois                 3.02% 
American Electric Power Co. Inc.      US:AEP  Columbus      Ohio                     2.87% 
Evergy Inc.                           US:EVRG  Kansas City   Missouri                 2.87% 
DTE Energy Co.                        US:DTE  Detroit       Michigan                 2.84% 
NiSource Inc.                         US:NI  Merrillville  Indiana                  2.69% 
Sempra Energy                         US:SRE  San Diego     California               2.65% 
Alliant Energy Corp                   US:LNT  Madison       Wisconsin                2.63% 
Eversource Energy                     US:ES  Springfield   Massachusetts            2.51% 
Xcel Energy Inc.                      US:XEL  Minneapolis   Minnesota                2.49% 
WEC Energy Group Inc                  US:WEC  Milwaukee     Wisconsin                2.48% 
Ameren Corp.                          US:AEE  St. Louis     Missouri                 2.39% 
CMS Energy Corp.                      US:CMS  Jackson       Michigan                 2.39% 
NextEra Energy Inc.                   US:NEE  Juno Beach    Florida                  2.15% 
Atmos Energy Corp.                    US:ATO  Dallas        Texas                    1.86% 
American Water Works Co.              US:AWK  Camden        New Jersey               1.61% 
NRG Energy Inc.                       US:NRG  Princeton     New Jersey               0.31% 
                                                                            Source: FactSet 

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10-08-19 1011ET

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