UTG Vs. UTF: More Reasons To Go With UTF Amid Lower Rates

Amid recent Federal Reserve interest rate cuts and expectations for further easing, the Cohen & Steers Infrastructure Fund (UTF) is now favored over the Reaves Utility Income Trust (UTG) for utility sector exposure. This preference stems from UTF's more aggressive leverage (approximately 30% versus UTG's 17%), which stands to benefit more significantly from declining borrowing costs. Furthermore, UTF currently trades at a notable valuation discount relative to UTG, evidenced by a dividend yield spread of 1.593% compared to a historical average of 0.944%, suggesting a superior risk/return profile despite UTF's higher ex-interest expense ratio and lower U.S. exposure.

Analysis

The Federal Reserve's recent 25 basis point rate cut and expectations for further easing significantly benefit leveraged utility funds. Cohen & Steers Infrastructure Fund (UTF), with approximately 30% effective leverage, is poised to gain more than Reaves Utility Income Trust (UTG) at ~17% leverage. UTF's higher interest expense component (2.47% vs. UTG's 1.49%) suggests a more substantial reduction in borrowing costs, enhancing its profitability.

UTF currently trades at a notable valuation discount relative to UTG, evidenced by a dividend yield spread of 1.593%, significantly above the historical average of 0.944%. UTF's 7.88% TTM dividend yield is slightly above its 4-year average, indicating a modest discount. In contrast, UTG's 6.05% TTM yield is notably below its 4-year average of 7.56%, implying a sizable premium.

Despite UTG's concentrated domestic utility exposure (108% US weight) and UTF's lower US exposure (45.6%) and higher management fees (1.20% vs. UTG's 0.71% excluding interest), the analyst concludes UTF's valuation discount and leverage benefits in a declining rate environment outweigh these factors. This positions UTF for a more favorable return/risk ratio compared to UTG.

Key Decisions for Investors

• Investors should consider initiating or increasing exposure to Cohen & Steers Infrastructure Fund (UTF) given its compelling valuation discount and higher leverage, which stands to benefit significantly from anticipated interest rate declines
• It may be prudent to evaluate existing Reaves Utility Income Trust (UTG) holdings for potential rebalancing towards UTF, acknowledging UTG's current valuation premium and less favorable interest rate sensitivity
• Closely monitor Federal Reserve monetary policy and treasury yields, as sustained rate reductions would further enhance UTF's relative attractiveness and performance