Rowland Wilhelm is vice president of Reaves Asset Management based in Jersey City, New Jersey, which is the ETF issuer for the Reaves Utilities ETF (UTES), an actively managed fund that focuses on the utility sector. ETF.com caught up with him to discuss the space and some of the key fundamentals that his firm uses when selecting stocks for the fund.
ETF.com: Utilities were one of the best-performing sectors of 2016—at least for the first half. Was it just the idea of safety, or was it an idea of income?
Rowland Wilhelm: It was a big safety trait. And then again, the number of baby boomers who are retiring on a daily basis are all looking for income. Other dividend sectors did pretty well, too. But the utilities sector was clearly No. 1. Having the Fed say it was going to raise rates four times last year, and actually doing it once, was another tail wind to the utility space. That was pretty much through early July, and then it just tailed off.
ETF.com: Why was that?
Wilhelm: A lot of that had to do with some better economic signals, a more hawkish Fed, and just the fact that the tea leaves were pointing to better economic statistics here in the U.S. The Fed funds rate went from about 1.7% to 2.5% fairly quickly, and then it really ramped up after Trump won. It's come down since. The 10-year Treasury is what you really should look at utilities against.
ETF.com: If utilities are a safe play, why would somebody leave that?
Wilhelm: Part of it is just trend-following. Next time you see rates go up, you'll see utilities take it on the chin for a short period of time. A lot of trend followers will leave and look for the next best thing.
You had a long bull market in bonds. People worried about that. Bonds have been uncompetitive compared to utilities for a long period of time now. The average utility that we can find is growing its earnings 5% and growing its dividend around 5% annually. That's not a bad total return starting from a 3% yield.