A Comprehensive Guide to Utility ETFs - ETF News And Commentary
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: 4 Sector ETFs to Watch in Q4 )
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, drawn-out process.
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: 3 Homebuilder ETFs Leading the Pack this Earnings Season )
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 Announcement?)
Utilities Select Sector SPDR ( XLU )
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 gas distributors.
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 ( IDU )
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 ( RYU)
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 )
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 ( PUI )
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 ( FUTY )
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 Utilities ).
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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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