When markets get volatile, investors tend to flock to safe haven sectors that can offer stability regardless of whether experts deem the economy to be in a recession. One of those sectors is utilities.
The equity roller coaster is already starting thanks to recession fears as economic data is sparking worries. Utilities will always be a necessity irrespective of what the economy is doing, making it a prime pick if a recession does hit.
As Barron's mentioned, utilities are also an option for fixed income investors. With bond yields lowering on the expectation that the Fed will cut rates, utilities dividends can help supplant that lost income.
"Many areas of the economy are seeing slowing growth and the U.S. added fewer jobs in July versus June, missing economists estimates," a Barron's report noted. "Not only does that make owning utilities’ earnings more attractive versus those of other sectors, but the 10-year yield is down to about 3.8%, making utilities’ current 3.2% yield look a bit better."
Additionally, utilities can also play off an additional catalyst and a familiar one: artificial intelligence (AI). The AI theme has been a persistent theme that's been leading gains for the stock market. A byproduct of that momentum is strength in the utilities sector.
Utilities Playing Off AI
As the number of consumers and businesses using AI increases, the current infrastructure that powers AI will require higher energy consumption. In turn, this should help boost utilities and for traders, this spells opportunities in the Direxion Daily Utilities Bull 3X Shares (UTSL).
Investors are already taking notice of utilities as a piggyback trade for AI.
"US investors are piling into utility stocks as the emergence of power-hungry artificial intelligence drives a surge in electricity demand and transforms growth expectations for the once staid sector," reported the Financial Times. "More than $1.7bn poured into US utilities funds, which have about $41bn across them, in May and June, their best showing in nearly two years, according to data from Morningstar Direct."
The 300% exposure from UTSL could amplify gains if the utilities sector continue to see strength. The S&P 500 Utilities Index is up about 15% for the year, and likewise, UTSL has been rising alongside of it with an almost 40% gain for the year due to the extra leverage.
Per its fund description, UTSL seeks daily investment results equal to 300% of the daily performance of the Utilities Select Sector Index. The index contains companies from the utilities sector that include the following industries: electric utilities; multi-utilities; water utilities; independent power producers and energy trades; and gas utilities.
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