Utility sector was in focus earlier this year as many
investors flocked to steady, high-dividend paying companies in
their search for yield in the ultra-low interest rate
environment. However, the sector has been under pressure for the
last few weeks as a result of the 'taper-talk'. Some longer-term
investors see the recent sell-off as an attractive opportunity to
get into this space.
The steady performance of utility companies lures investors to
this sector. The biggest positive for the utilities is that there
is hardly any viable substitute for utility services. Utilities
are known to pay dividends consistently, thereby retaining
investor confidence. (Read:
Two Hedged ETFs Built for Rocky Markets
As a result of increasing demand for utility services,
particularly for electricity, and more stringent environmental
regulations and restrictions, utility operators are gradually
shifting their focus to larger generation units, new technologies
and renewable sources. However, implementation of these new
technologies, over vast service territories, is a long, drawn-out
Bond ETFs Experience Massive Outflows
The sector is highly regulated due to monopolistic nature of
the business and also since governments try to ensure the prices
of these supplies -- water, electricity, etc. -- stay within
reasonable limits. Utility companies, on the other hand, try to
increase prices through the filing of rate cases. Investments and
costs incurred for the modernization and maintenance of reliable
services are recovered through these rate cases.
to Tap the Sector
Services provided by utilities are always in demand, while
positive movement in the economy tends to increase the demand for
these 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:
QE Tapering could make these ETFs winners
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
The ETF launched on Dec 15, 1998, presently has an asset base
of $5.96 billion. This fund holds 32 stocks and the top 10
companies hold a 57.37% share of total net assets. The average
daily volume is close to 4 million shares per day. The fund has a
dividend yield of 4.05%.
Among individual holdings, top stocks in the ETF include Duke
Energy, Southern Co, and Dominion Resources comprising 9.43%,
8.08% and 6.86%, respectively, of total net assets.
Vanguard Utilities ETF (
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 formed on Jan 15, 2004. Presently this fund
manages an asset base of $1.46 billion. This fund holds 79 stocks
and the top 10 companies hold 47.35% of total net assets. The
average daily volume is about 50,000 shares and the fund has a
dividend yield of 3.74%.
The top three individual holdings in the ETF include Duke
Energy, Southern Co. and Dominion Resources with asset allocation
of 8.39%, 7.00% and 5.55%, 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 $1.03 billion. Launched on
Jun 11, 2000, IDU presently holds 64 companies. The top 10
companies hold 47.04% of total net assets. The average daily
volume is close to 100,000 shares and the fund has a dividend
yield of 2.44%.
Once again Duke Energy, Southern Co. and Dominion Resources
hold the top three spots in the fund with 8.21%, 6.50% and 5.51%
of the 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 Oct 31, 2006 and currently has 40
companies, with the top 10 holding 26.62% of total net assets.
The average daily volume is low at about 2,000 shares. The fund
has a dividend yield of 3.74%.
The top three stocks include Sprint Nextel Corp., Exelon Corp
and FirstEnergy Corp. with asset allocation of 2.80%, 2.73% and
First Trust Utilities AlphaDEX (
FXU seeks investment results that correspond generally to the
price and yield to 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
$195.9 million. The average daily volume is 10,000 shares. The
fund holds 46 stocks in total in its basket, with the top 10
companies comprising 35.02% of total net assets. The fund
has a dividend yield of 4.97%.
Energen Corp, Public Service Enterprise Group Inc., and
MetroPCS Communications Inc. are the top three holdings with fund
allocation of 3.97%, 3.86% and 3.77%, 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 Oct 25, 2005, the ETF has assets worth $38.2
million. The average daily volume is about 20,000 shares. It is
spread across 61 companies with the top 10 companies holding
25.89% of total net assets. The fund has a dividend yield of
The top three stocks include Sprint Nextel Corp., Verizon
Communications and FirstEnergy Corp. with asset allocation of
2.74%, 2.69% and 2.60%, respectively.
To Sum Up
As per the U.S. Energy Information Administration (EIA)
report, the increasing demand for electricity would result in an
addition of 340 GW of power production units from 2012 through
2040. Natural gas usage in the U.S. will increase from 24.37
trillion cubic feet in 2011 to 29.54 trillion cubic feet in 2040.
The figures suggest a rising demand for utility services in the
decades to come.
Despite the state the economy, Utility ETFs are expected to
yield stable returns going forward. (Read
Consider This ETF for a Better Investment in
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FT-UTIL ALPHA (FXU): ETF Research Reports
ISHARS-DJ 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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