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Add Some Adrenaline To The Utilities Trade

Benzinga logo Benzinga 11/30/2020 ETF Professor
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Every sector has a reputation and when it comes to utilities, one of the smallest groups in the S&P 500, the group's rep is one of boredom and stodginess.

What Happened

There ways to breathe life into the usually sleepy utilities sector, including the Direxion Daily Utilities Bull 3X Shares (NYSEARCA: UTSL). UTSL, the dominant force among leveraged utilities exchange traded funds, looks to deliver triple the daily returns of the Utilities Select Sector Index.

UTSL's underlying index is lower by 1.33% year-to-date, a disappointing performance when considering the utilities sector historically benefits from low interest rates – the exact scenario the Federal Reserve delivered earlier this year.

However, the Utilities Select Sector Index is higher by almost 8% over the past 90 days, indicating momentum is building for UTSL as 2020 draws to a close.

Why It's Important

Strong and steady growth bolsters the case for utilities assets and could provide near-term opportunity with the leveraged UTSL.

“Still, we remain more bullish than most industry forecasts even while assuming that energy efficiency remains a fierce headwind,” according to Morningstar research. “Electricity is set to take share from other energy sources, such as coal, oil, and eventually natural gas. This offers utilities long-term infrastructure investment opportunities, supporting our 5.5% annual earnings growth outlook for the sector.”

Heading into 2021, UTSL is appealing because as the U.S. economy snaps out of its COVID-19 funk, electricity demand should increase.

“We expect electricity demand to bounce back to prepandemic levels next year as the economy recovers. In the long run, we continue to believe electricity demand will break out of a decadelong slump,” notes Morningstar.

What's Next

While many investors perceive the utilities sector as being boring and bland, the group actually has some compelling outlets for growth thanks to emerging, disruptive technologies.

“Our growth estimate for new sources of electricity demand adds 20 basis points to our annual demand growth forecast,” says Morningstar. “We estimate data centers, electric vehicles, and cannabis cultivation electricity use will represent 18% of new electricity demand during the next decade and grow to 5% of total U.S. electricity use by 2030, up from 3% now.”

Adding to the case for UTSL is that several of the components in the Utilities Select Sector Index are bolstering their renewable energy footprints, providing another lucrative growth avenue.


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