The utilities sector is known for its non-cyclical nature. We
hardly find utility shares garnering massive gains, but the sector
is the darling of risk-averse investors thanks to their regulated
nature of operations and steady return to shareholders. These
provide a safe haven in tough times, but do not have the potential
to skyrocket in boom times.
In such a scenario, investors can watch out for an ETF -
NASDAQ Clean Edge Smart Grid Infrastructure Index
) - which is mix of great return and Medium risk outlook (read:
A Comprehensive Guide to Utility ETFs
GRID in Focus
The fund offers exposure across the grid and electric energy
infrastructure sector. It tracks the Nasdaq OMX Clean Edge Smart
Grid Infrastructure Index and holds 31 securities in its basket.
In terms of industries, electrical equipment takes the top spot
with around 35% of exposure, followed by modest allocations to
Engineering & Construction and Electric utilities.
The product gained over 23.7% in the year-to-date time frame (as of
November 6) and 18.3% in the trailing one-year period (as of
September 30) beating the sector behemoth -
SPDR Utilities Select Sector Fund
) - which delivered a 11.3% year-to-date return.
GRID's year-to-date return was also way higher than that of
Vanguard Utilities ETF
) which gained about 13%,
iShares Dow Jones US Utilities Sector Index Fund
) that added 13.1% and
Guggenheim S&P 500 Equal Weight Utilities ETF
) which returned 12.7%.
Why GRID is Breezing Past its Utility Cousins
There are several features that distinguish GRID from other regular
utility funds. Unlike the above-said funds which solely focus on
utilities, GRID has as much as 72% exposure in industrials followed
by utilities and technology each accounting for just 14% of the
total. This makes GRID somewhat less interest rate sensitive.
As a result, investors unnerved about a fresh round of taper talk
next year, might favor GRID over other utility funds as interest
rates are likely to rise if the Fed begins tapering (read:
Utility ETFs: Winners After the No Taper
Utilities require huge infrastructure which put a massive debt
burden and the resultant interest obligation on these companies.
This leaves the sector with no scope of outperformance in a rising
Although by a margin, the fund is open to the technology sector
which recently came into limelight after turning around the weak
earnings trend of the last few quarters.
Moreover, unlike pure utilities that normally are drawn towards
value stocks, GRID puts focus on the soaring growth stocks (by
about 40%) which is providing GRID the edge over the broader space.
Notably, growth investing is basically a momentum play, which makes
it a great strategy in a trending market (i.e. a market
characterized by a prolonged uptrend).
Also, GRID steers its focus away from the large cap space as
evidenced from just 24% exposure in it. This is in stark
contrast to the above-mentioned funds most of which put at least
65% of assets in large caps (see
all the Utility ETFs here
Mid and small caps each take 38% share of GRID. As we all know, mid
and small caps are known for their growth profiles while the larger
ones for stability. Since smaller companies generally bounce back
faster in a reviving economy than the larger ones, it is now quite
clear why GRID took the shine off the regular utility funds.
Further, as opposed to the above-said funds, GRID has almost half
of the total exposure in Europe. With Europe waking up from a
two-year crisis and manufacturing activity gaining momentum, GRID
has easily become a beneficiary of the upswing. Also, the recent
interest rate cut
by the European Central Bank should lend a hand to GRID's
Despite hailing from the broad utility and infrastructure sector,
GRID's uniqueness helped it surge this year. This solid run is also
expected to continue in the final quarter as the sentiments in the
broad economy are in favor of GRID (also see
Power Your Portfolio with These Utilities
On the downside, GRID is slightly pricier as it charges a fee of 70
bps compared to the average expense ratio of 0.55% charged by the
funds in the utilities space. However, its recent outperformance
compared to others in the space should more than make up for this
added cost for most investors, especially if other utilities get
hit by rising rates in the months ahead.
Want the latest recommendations from Zacks Investment Research?
Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
FT-NDQ CESGI IF (GRID): ETF Research Reports
ISHARS-US UTIL (IDU): ETF Research Reports
VIPERS-UTIL (VPU): ETF Research Reports
SPDR-UTIL SELS (XLU): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for the
Next 30 Days. Click to get this free report