The U.S. economy is showing clear signs of recovery, and while
the pace of recovery is very slow, the economic situation here is
much better compared to most other developed economies. . As a
result, the year has also seen broader U.S. stock market gain,
though European woes and slowdown in the emerging economies still
continue to impact the market.
In times of uncertainty, investors move their investment
from riskier sectors to more defensive plays. Defensive sectors
have a low correlation with the broader market which allows them
to remain stable in times of economic uncertainty.
In particular, Utility firms have of late been solid
performers and could continue to play a leadership role in the
coming months. That is because Utility firms remain more or less
immune to economic cycles and play a defensive role when the
macro economy is under pressure. (
Comprehensive Guide to Utility ETF Investing
)
The sector includes electric utilities; multi-utilities;
independent power producers & energy traders; and gas
utilities which are considered indispensable for daily living.
Utility ETFs therefore flourished during the downturn because of
steady demand.
Also, in this low rate environment when investors shift their
focus to high yield investment for a certain level of current
income, investment in Utility ETFs is warranted as they not only
offer capital appreciation but also pay attractive dividends on a
consistent basis to their investors. (
Utility ETFs: Slumping Sector In Rebounding
Market
)
Vanguard Utlities ETF (VPU)
and
Dow Jones U.S. Utilities Sector Index Fund (IDU)
Both these #1 Zacks ETF Rank (Strong buy) funds in the Utility
space hold their appeal to investors. We expect these funds to
outperform their peers.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in
the context of our outlook for the underlying industry, sector,
style box, or asset class. Our proprietary methodology also takes
into account the risk preferences of investors. ETFs are ranked
on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also
receive one of three risk ratings, namely Low, Medium, or
High.
The aim of our models is to select the best ETFs within each
risk category. We assign each ETF one of five ranks within each
risk bucket. Thus, the Zacks Rank reflects the expected return of
an ETF relative to other products with a similar level of
risk.
For investors seeking to apply this methodology to their
portfolio in the U.S. Utility market, we have taken a closer look
at the top ranked VPU and IDU below:
Vanguard Utilities ETF (
VPU
)
The Vanguard Utilities Fund is one of the oldest products in
the space which provides exposure to the consumer sector at the
lowest cost when compared with the category average. The ETF
seeks to provide investment results that correspond generally to
the price and yield performance, before fees and expenses, of the
MSCI US Investable Market Utilities 25/50 Index.
The fund invests its $1.5 billion assets in a basket of 79
stocks. However, with 48.4% of its assets invested in the top ten
holdings, the the fund is somewhat concentrated.
Among the sectors,the fund is more tilted towards Electric
Utilities and Multi Utilities, as these two hold the lion's share
making up (combined) 86.8% of the total investment. For this
exposure, the investor pays an expense ratio of 19 basis points,
one of the lowest in the space. Due to a lower correlation with
the broader market, the fund delivered a return of 13.5% over a
period of one year. (
Three Low Beta ETFs For The Uncertain Market
)
Dow Jones U.S. Utilities Sector Index Fund (
IDU
)
The product debuted in the middle of 2000 and tracks the Dow
Jones U.S. Utilities Index. The ETF employs a representative
sampling technique of stock selection based on certain
fundamental and market capitalization characteristics.
Unfortunately, investors have to pay a higher amount in fees
and expenses for this fund as it charges 0.47% for expenses
annually. (
11 Great Dividend ETFs
)
IDU pays out a yield of 3.34% per annum and currently holds 67
securities in its portfolio. It has total assets of about $666.4
million with a 48.12% allocation towards the top 10 holdings.
The high expense ratio of the ETF compared to other ETFs in
the utility space has, however, been justified. This is because
IDU has performed relatively better than most of its
counterparts, returning 13.38% on a yearly basis.
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ISHARS-DJ UTIL (IDU): ETF Research Reports
VIPERS-UTIL (VPU): ETF Research Reports
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