Utility services play a vital role in a nation's economic
progress as cheap and abundant supply of power keeps the wheels
of development rolling. With development comes the need for more
power, as cities expand, and the use of new gadgets increases.
However, everything comes for a price. Greenhouse gas emitted by
large utilities cause immense damage to the environment.
Utilities have been under the scanner for a long time. However,
the climate action plan from President Obama earlier this year,
followed by the U.S. Environmental Protection Agency's (EPA)
proposal for granting permission for setting up new power plants
are putting immense pressure on power producing units. (Read:
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The utility operators are implementing new technologies in
generation and distribution of power. The introduction of smart
meters will benefit customers while the smart-grid technology is
likely to increase efficiency. However, implementation of
these new technologies, over vast service territories, is a long,
In addition, the cost involved in implementing the latest
requirement from the environmental agencies could make power
plants run on coal costlier than before. This is compelling power
generators to install more eco-friendly power units and develop
more power from renewable energy sources. (Read:
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The steady performance of the companies lures investors to the
utility space. The biggest positive for the utilities is that
there is hardly any viable substitute for utility services. In
addition, consistent payment of dividends also makes this sector
attractive and the defensive nature of operations insulates the
sector from market turbulence.
ETFs to Tap the Sector
The services provided by utilities are always in demand, while
positive movement in the economy tends to increase the demand for
utility services. Below, we highlight the exchange traded funds
(ETFs) in the Utility sector which primarily have a U.S. bias.
Investing in these funds in basket form greatly reduces the risk
of investing in particular stocks. Moreover, if one is interested
in playing a sector, ETFs have an edge because it comes in a
packaged form that gives instant access to a specific sector, the
Utility sector in this particular case. (Read:
Utility ETFs: Winners After the No Taper
Utilities Select Sector SPDR (
XLU is one of the most popular and widely traded utility ETFs.
The main purpose of this fund is to provide investment results
that correspond to the performance of the utilities select sector
index. This fund invests nearly 95% of its total assets in the
securities comprising the index. The index includes
communications services, electrical power providers, and natural
Launched on December 15, 1998, presently XLU has an asset base of
$5.5 billion. This fund holds 32 stocks and the top 10 companies
hold a 56.98% share of total net assets. The average daily volume
is 11,215,310 shares. The fund has a dividend yield of 3.77% and
an expense ratio of 0.18%.
Among individual holdings, Duke Energy Corporation, Southern Co.
and NextEra Energy Inc. comprising 9.20%, 8.04% and 7.24%,
respectively, of total net assets take up the top three spots.
Vanguard Utilities ETF (VPU)
This ETF aims to match the performance of the MSCI US Investable
Market Utilities Index. This fund employs nearly all its assets
in the stocks that form the index.
The ETF was launched on January 15, 2004. Presently this fund
manages an asset base of $1.37 billion. This fund holds 79 stocks
and the top 10 companies hold 46.98% of total net assets. The
average daily volume is 78,002 shares. The fund has a dividend
yield of 3.66% and an expense ratio of 0.14%
The top three individual holdings in the ETF include Duke Energy
Corporation, Southern Co. and Dominion Resources with asset
allocation of 8.47%, 6.80% and 5.54%, respectively.
iShares Dow Jones US Utilities (
The fund seeks to match the performance and yield of the Dow
Jones U.S. Utilities Sector Index. The fund invests at least 90%
of its assets in securities of the index and in depositary
receipts representing securities of the index.
The fund manages an asset base of $0.9 billion. Launched on Jun
11, 2000, IDU presently holds 65 companies. The top 10 companies
hold 46.90% of total net assets. The average daily volume is
448,451 shares. The fund has a dividend yield of 3.18% and an
expense ratio of 0.46%.
Once again Duke Energy Corporation, Southern Co. and NextEra
Energy Inc. hold the top three spots in the fund with 7.94%,
6.40% and 5.77% of net assets, respectively.
Guggenheim S&P 500 Eq Weight Utilities (
The fund seeks to replicate the performance of the S&P 500
Equal Weighted Telecommunication Services and Utilities sector.
The fund will normally invest at least 90% of its net assets in
common stocks that comprise the index.
The fund debuted on October 31, 2006, and currently has 39
companies, with the top 10 holdings comprising 26.72% of total
net assets. The average daily volume is 3,494 shares. The fund
has a dividend yield of 3.58% and an expense ratio of 0.50%.
The top three stocks include PPL Corporation, Crown Castle
International Corp. and NextEra Energy Inc. with asset allocation
of 2.72%, 2.70% and 2.68%, respectively.
First Trust Utilities AlphaDEX (
FXU seeks investment results that correspond generally to the
price and yield of the StrataQuant Utilities AlphaDex Index. The
fund will normally invest at least 90% of its net assets in
common stocks that comprise the index
Launched on May 7, 2007, the fund manages an asset base of $117
million. The average daily volume is 519,479 shares. The fund
holds 46 stocks in total in its basket, with the top 10 companies
comprising 39.33% of total net assets. The fund has a
dividend yield of 4.46% and an expense ratio of 0.70%.
T-Mobile US Inc., NV Energy Inc., and Telephone and Data Systems,
Inc. are the top three holdings with fund allocation of 5.37%,
4.27% and 4.02%, respectively.
PowerShares Dynamic Utilities (
The ETF is linked to the Dynamic Utilities Indellidex
Index. This index evaluates utilities based on its stock
valuation, investment timeliness and fundamental strengths.
The fund generally invests 90% of its total assets in the common
stocks of the utilities that match its criteria.
Formed on October 25, 2005, the ETF has assets worth $40.4
million. The average daily volume is 6,698 shares. It is spread
across 59 companies with the top 10 companies holding 26.37% of
total net assets. The fund has a dividend yield of 2.60% and an
expense ratio of 0.63%.
The top three stocks include DISH Network Corp., NextEra Energy
Inc. Comcast Corp Class A with asset allocation of 2.81%, 2.74%
and 2.65%, respectively.
Fidelity MSCI Utilities Index ETF (
Launched last month, FUTY is the latest addition to the Utilities
ETFs line-up. It tracks the MSCI USA IMI Utilities Index.
The product holds 79 securities in its basket with the top ten
holdings accounting for 46% of the asset base. Top three holdings
as of now are Duke Energy, NextEra Energy and Dominion Resources.
The fund charges a low expense ratio of 12 basis points.
To Sum Up
Despite the assured demand for services, the utilities have to
constantly meet the high expectations of its wide customer base,
adapt to a changing global economic scenario, and upgrade
technologies to meet stringent environmental norms.
We hardly find utilities posting eye-catching numbers, but these
companies are generally stable due to the regulated nature of
operations, and they are loyal to shareholders. The strength lies
in their value and yield. So, investors looking for a steady
return on their investments could take a Utility ETF approach.
Besides the large caps, investors could also look into the small
caps for investing in utility ETFs (Read
Consider This ETF for a Better Investment in
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FID-UTILITY (FUTY): ETF Research Reports
FT-UTIL ALPHA (FXU): ETF Research Reports
ISHARS-US UTIL (IDU): ETF Research Reports
PWRSH-DYN UTIL (PUI): ETF Research Reports
GUGG-SP5 EW UTL (RYU): ETF Research Reports
VIPERS-UTIL (VPU): ETF Research Reports
SPDR-UTIL SELS (XLU): ETF Research Reports
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