Has the Utilities Rally Arrived?
The Bank of Canada (BoC) cut rates for the first time in four years on June 5, ending one of the most aggressive hiking cycles in Canadian history. Market expectations are for two additional cuts before the end of the year, with another cut potentially coming as early as July.
June 2024
The Bank of Canada (BoC) cut rates for the first time in four years on June 5, ending one of the most aggressive hiking cycles in Canadian history. Market expectations are for two additional cuts before the end of the year, with another cut potentially coming as early as July. Moreover, forecasters are predicting the BoC could potentially cut the overnight rate more than a full percentage by this time next year, to 3.5%, presenting more opportunity for the Utilities sector to rally.1
South of the border, rate expectations are falling as well, with the U.S. Federal Reserve (Fed) now expected to cut rates twice before the end 2024 with the first potentially taking place in September.
With the anticipation of further rate cuts from the BoC and the Fed, we may well see the Utilities sector continue to shine. 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.
For the long-term investor, utilities offer investors stable and consistent dividends over time, along with lower volatility. The long-term 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.
Featured Fund
| Name | Management Fee |
|---|---|
| BMO Covered Call Utilities ETF Fund | 0.65% |
For Series F. As of May 31, 2024.
For those looking to participate in the Utilities sector, consider the BMO Covered Call Utilities ETF Fund. Its underlying ETF, the BMO Covered Call Utilities ETF (Ticker: ZWU), has been one of BMO GAM’s most popular covered call strategies, accumulating a total of $1.8 billion in AUM as of May 31st, 2024.2 This Fund also has a diversified basket with an equal weight approach.3 Investors have the opportunity to capture cashflow and growth throughout North America as the BMO Covered Call Utilities ETF Fund is diversified across Canada and the U.S. with 60% in Canada and 40% in the U.S.-listed stocks. 1
1 Bloomberg, as of June 6, 2024.
2 BMO Global Asset Management.
3 Bloomberg holdings, as of June 5, 2024.
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This article was published on June 28, 2024.
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BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
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