Strategy

Utilities: A Long-Term Holding That Looks Poised for a Breakout

May 13, 2024

In anticipation of a rate decrease from the Bank of Canada (BoC) we may see the Utilities sector start to shine. Canadian government bond yields tend to have an inverse relationship with utilities (when interest rates drop, utility stock prices typically increase, and vice versa). This is mainly due to the costs involved with sector companies. The cost of construction for power plants, and the maintenance of infrastructure required to deliver gas, water, or electricity can make utilities expensive when the cost of borrowing is high. 

The BoC has remained cautious not to spark a resurgence in inflation by cutting rates too soon, along with trying to resist cutting ahead of the U.S. Federal Reserve. However, market expectations are now showing a 50% chance the BoC will cut in June and a 100% chance of a cut in July,1 presenting an opportunity for the sector. 

Moreover, there is a potential trade developing for technical investors. A double bottom” reversal pattern is developing on the S&P/TSX Utilities Index chart following the successful test of the late 2023 low. A close above resistance at 2,456 would complete the pattern, shifting the long-term trend back to bullish, and opening an initial upside target of 2,800. This could present a great deal of upside potential with a gain of nearly 19% from the recent closing price. New buy signals in short-term momentum gauges suggest there is an opportunity on the upper end of the pattern at 2,456.2

Chart
Source: BMO Wealth Management May 62024.

Additionally, for the long-term investor, utilities offer investors stable and consistent dividends over time along with lower volatility. The growth potential to deliver safe and reliable returns, make the sector an attractive investment to consider adding to your portfolio. There are long-term benefits for Canadian investors, especially those who might consider the current environment as an opportunity to capture growth.

Utility ETFs

Name

Ticker

Management Fee

Distribution Yield3

BMO Equal Weight Utilities Index ETF

ZUT

0.55%

4.84%

BMO Covered Call Utilities ETF

ZWU

0.65%

8.42%

3Bloomberg May 62024.

If you are looking to capitalize on the potential upside to the Utilities sector look to the BMO Equal Weight Utilities Index ETF (Ticker: ZUT). ZUT is an equal weight strategy that pays an attractive distribution yield of 4.84%.3 Equal Weight can be an effective strategy for reducing concentrated risk by approximately weighting each stock equally across the ETF’s 15 holdings.5 Furthermore, the equal weight strategy can be a powerful index construction methodology both to mitigate individual security concentration and properly diversify market capitalization exposure. The smaller companies within ZUT not only have the diversification support of the larger companies, but when the sector starts to pick up momentum, those companies have the potential of outperformance due to their cyclical nature. 

For those looking to have attractive distribution yield and want to participate in the Utilities sector at a more cautious approach, the BMO Covered Call Utilities ETF (Ticker: ZWU) has been one of BMO’s most popular covered call strategies, accumulating a total of $1.8 billion in AUM as of May 6, 2024.1 ZWU pays a distribution yield of 8.42%3 and when reinvested into the portfolio can provide more cushion in downward markets. This ETF has a diversified basket of 79 holdings with an equal weight approach.5 Investors have the opportunity to capture cashflow and growth throughout North America as ZWU is diversified across Canada and U.S. with 60% in Canada and 40% in the U.S.1

Annualized Daily Returns as of May 9, 2024.4

Fund
Ticker
1-Month
3-Month
6-Month
1-
Year
3-Year
5-Year
10-Year

BMO Equal Weight Utilities ETF

ZUT

5.89%

6.40%

6.27%

-11.64%

-2.75%

5.99%

6.60%

BMO Covered Call Utilities ETF

ZWU

3.14%

6.06%

7.54%

-3.26%

0.73%

2.62%

3.09%

Annualized Month End Returns as of April 30 2024.4

Fund
Ticker
1-Month
3-Month
6-Month
1-
Year
3-Year
5-Year
10-Year

BMO Equal Weight Utilities ETF

ZUT

-1.16%

-0.61%

8.04%

-6.56%

-0.28%

1.79%

2.85%

BMO Covered Call Utilities ETF

ZWU

-2.46%

-4.55%

6.17%

-16.65%

-5.44%

4.54%

5.91%


1 Bloomberg as of May 62024.

2 Technical Indicators Source: BMO Wealth Management May 62024.

3 This yield is calculated by taking the most recent regular distribution, or expected distribution, (excluding additional year end distributions) annualized for frequency, divided by current NAV. The yield calculation does not include reinvested distributions.

4 Annualized Daily Returns and Annualized Month End Returns. Source: Morningstar, May 92024.

5 Bloomberg holdings as of May 62024.

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