Utility services undoubtedly play a major 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 at a price, as green-house gases emitted
by large utilities cause irrevocable damage to the environment.
Per U.S. Energy Information Administration (EIA), total energy use
in the U.S. will increase to 106.3 quadrillion Btu in 2040 from 95
quadrillion Btu in 2012. Most of this demand is expected to come
from the Industrial sector followed by the Commercial sector.
Even so, the utilities have been under review for a long time. The
climate action plan of the U.S. President followed by the U.S.
Environmental Protection Agency's (EPA) proposal for tightening the
rules to set up new power plants are putting immense pressure on
power producing units. Recently, the EPA proposed a rule to lower
carbon dioxide emissions from power plants by 30% by 2030 from 2005
What is Behind the Recent Clean Energy ETF
To meet the stringent regulation, utilities are now gradually
shifting their emphasis towards natural gas and alternate energy
sources to produce power. The utility operators are also
implementing new technologies in generation and distribution of
Utilities are by their very nature monopolistic businesses. As a
result, the sector is highly regulated as the essential supplies
cater to basic human needs, and governments try to ensure the
prices of these supplies - water, electricity, etc. - stay within
The utilities, on the other hand, try to increase prices through
the filing of rate cases. The investments and costs incurred for
the modernization and maintenance of reliable services are
recovered through these rate cases.
Mainly, 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 (read:
3 Utility ETFs Surviving the Market Turmoil
ETFs to Tap the Sector
The services provided by the utilities are always in demand. Added
to this any positive movement in the economy tends to increase the
demand for utility services. In addition, consistent payment of
dividends makes utility ETFs attractive. The defensive nature of
operations insulates these ETFs from market turbulence (see all
Below, we highlight the ETFs in the Utility sector which primarily
have a U.S. bias.
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.
The index includes communications services, electrical power
providers, and natural gas distributors.
Launched on December 15, 1998, XLU has an asset base of $5.5
billion. This fund holds 31 stocks and the top 10 companies hold a
59.45% share of total net assets. The average daily volume (3
months) is 12,509,709 shares. The fund has a dividend yield of
3.49% and an expense ratio of 0.18%.
Among individual holdings, Duke Energy Corporation, NextEra Energy
Inc. and Dominion Resources comprising 8.84%, 8.09% and 7.66%,
respectively, of total net assets take up the top three spots.
Vanguard Utilities ETF (
This ETF aims to match the performance of the MSCI US Investable
Market Utilities Index. The ETF was launched on January 15, 2004.
Presently this fund manages an asset base of $1.6 billion.
This fund holds 78 stocks and the top 10 companies hold 48.51% of
total net assets. The average daily volume (3 months) is 131,846
shares. The product has a dividend yield of 3.41% and an expense
ratio of 0.14%.
The top three individual holdings in the ETF include Duke Energy
Corporation, NextEra Energy Inc. and Dominion Resources with asset
allocation of 7.91%, 6.54% and 6.34%, 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 ETF manages an asset base of $0.7
billion. Launched on June 11, 2000, IDU presently holds 63
The top 10 companies comprise 49.36% of total net assets. The
average daily volume (3 months) is 77,238 shares. The fund has a
dividend yield of 3.04% and an expense ratio of 0.48%.
Duke Energy Corporation, NextEra Energy Inc. and Dominion Resources
comprising 7.87%, 6.65% and 6.29%, respectively, of total net
assets take up the top three spots.
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. RYU
debuted on October 31, 2006, and currently has 36 companies, with
the top 10 holdings comprising 31.28% of total net assets. The
average daily volume (3 months) is 32,835 shares. The fund has a
dividend yield of 3.23% and an expense ratio of 0.50%.
The top three stocks include Pepco Holdings Inc., CenturyLink Inc.
and Exelon Corp. with asset allocation of 3.64%, 3.28% and 3.20%,
First Trust Utilities AlphaDEX (
FXU seeks investment results that correspond generally to the price
and yield of the StrataQuant Utilities AlphaDex Index. Launched on
May 7, 2007, the fund manages an asset base of $221.0 million. The
average daily volume (3 months) is 129,918 shares.
The product holds 45 stocks in total in its basket, with the top 10
companies comprising 39.88% of total net assets. The fund has
a dividend yield of 3.49% and an expense ratio of 0.70%.
Entergy Corp., Level 3 Communications Inc. and Telephone and Data
Systems, Inc. are the top three holdings with fund allocation of
4.54%, 4.48% and 4.25%, 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. Formed on
October 25, 2005, the ETF has assets worth $41.9 million.
The average daily volume (3 months) is 8,026 shares. It is spread
across 44 companies with the top 10 holdings comprising 41.04% of
total net assets. The fund has a dividend yield of 2.17% and an
expense ratio of 0.60%.
The top three stocks include Sempra Energy, ONEOK Inc. and Duke
Energy Corporation, with asset allocation of 5.12%, 4.88% and
To Sum Up
The biggest positive for the utilities is that there is hardly any
viable substitute for their services. This is the most fundamental
strength of the industry. Moreover, increasing demand drives this
The power producers are trying to find out new means and innovative
technology to produce more power at a cheaper rate. We all know the
reserves of fossil fuels, the primary source for power generation,
are limited and cannot be replenished. In addition, fossil fuel
usage increases air pollution, so the shift is on to generate more
power from renewable and alternate sources.
Though the percentage of alternate or green energy in the power
generation fuel mix does not compare to coal at present levels, the
shift is surely on. Traditional operators are now compelled to
diversify their fuel basket and increasingly generate power from
other less harmful sources. Even while operating coal-fired
generation plants, stringent regulations have ensured that they
make necessary additions to curb pollution.
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 majority of
utility operators also benefited from a severe U.S. winter that
perked up demand. In the end, the strength lies in their value and
yield. So, investors looking for a steady return on their
investments could take a Utility ETF approach.
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SPDR-UTIL SELS (XLU): ETF Research Reports
VIPERS-UTIL (VPU): ETF Research Reports
ISHARS-US UTIL (IDU): ETF Research Reports
GUGG-SP5 EW UTL (RYU): ETF Research Reports
FT-UTIL ALPHA (FXU): ETF Research Reports
PWRSH-DW UTL MO (PUI): ETF Research Reports
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