The Comprehensive Guide to Utility ETFs - ETF News And Commentary
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 process. (Read: 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.
ETFs 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 )
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.
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 ( 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 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 ( 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 $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 ( 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 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 2.66%, respectively.
First Trust Utilities AlphaDEX ( FXU )
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 ( 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 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 2.44%.
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 Utilities
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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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