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3 Utilities Funds to Power Up Your Portfolio - Best of Funds

Utilities Select Sector SPDR (XLU) has gained about 12.4% so far this year. That is a significant lead over the other 10 S&P industry groups. The energy sector follows with a 6.5% gain year to date. The utilities sector thus has been enjoying an almost unrivaled bullish trend.

The utility sector, which is said to be a lifeline for the development of any country, is in the midst of a business and technology transformation in the United States. Going forward, strategic transformation on that note will further see the industry achieving new feats. Thus, the sector looks promising for investment purposes as well.

Utilities Sector

As the term itself suggests, the sector includes utilities stocks such as gas and power. The sector also includes electric, gas and water companies.

The utilities sector has generally been considered to include widow-and-orphan stocks. These are stocks that pay high dividends and pose less risk. However, the industry has seen a vast change in the face of new regulatory changes, price volatility, changing demand and the entry of new players. The big monopolies now do not necessarily run the entire show from generating power to retailing. Investopedia lists the allocation of supplier segments as Generators, Energy Network Operators, Energy Traders and Marketers and Energy Service Providers and Retailers.

Demand for Energy on the Rise

According to a U.S. Energy Information Administration (EIA) report, total energy use in the U.S. will increase to 106.3 quadrillion Btu in 2040 from 95 quadrillion Btu in 2012. Most of this demand is expected to come from the Industrial sector followed by the Commercial sector.

Even so, the utilities have been under review for a long time. The climate action plan of the U.S. President followed by the U.S. Environmental Protection Agency's (EPA) proposal for tightening the rules to set up new power plants are putting immense pressure on power producing units.

Utilities are now gradually shifting their emphasis toward natural gas and alternate energy sources to produce power. Global concerns about the pitfalls of green-house gas emissions supported by increasingly stringent government regulations have brought alternative energy into the limelight.

Positives for Utilities

There is hardly any viable substitute for utility services. This is the most fundamental strength of the industry. Moreover, increasing demand drives this industry forward.

Another inherent advantage of the utilities is their size and the requirement of huge initial capital outlay. For this reason, generally there are not many new entrants in the market. Also, stringent government regulations and the hard toil for new entrants to establish a loyal consumer base put existing players in an advantageous position.

Finally, utilities have been known to pay dividends consistently, thereby retaining investor confidence. This was evident during the economic crisis of 2008-2009 when these operators continued to pay out dividends without fail.

Challenges

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. In fact, new technologies to produce power at a cheaper rate and emerging alternative resources for the generation of green power are inevitable requirements for the industry's growth.

Investing in Utilities Sector

As already said, utilities sector comprise high dividend paying companies. Moreover, while the fortunes of some industries are more allied to the overall economy than others, few show as little volatility and are as stable as the utility sector. Thus, risk-averse investors may find it ideal to invest in utility funds.

Here we will suggest three Zacks Mutual Fund Rank #1 (Strong Buy) utilities funds. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund. These funds also provide decent dividend yield and have relatively lower expense ratio.

Vanguard Utilities Index Fund Admiral Shares (VUIAX) tracks the performance of MSCI US Investable Market Index (IMI)/Utilities 25/50 by using indexing investment approach. It seeks to perform in line with the benchmarks index's performance and invests all its assets in stocks that constitute the index. This index consists of companies from the utilities sector regardless of their market capitalization.

The fund has a dividend yield of 3.28%. It has an expense ratio of 0.14% as compared to category average of 1.28%. The fund has returned 12.8% year to date.

Prudential Jennison Utility A (PRUAX) invests in equity and investment-grade debt securities of companies from the utility sector. The fund may invest over half of its assets in foreign securities. The fund also takes part in initial public offering (IPO) market.

The fund has a dividend yield of 3.07%. It has an expense ratio of 0.85% as compared to category average of 1.28%. The fund has returned 11.8% year to date.

Fidelity Select Utilities Portfolio (FSUTX) invests the majority of its assets in utility companies or those deriving a large share of their revenues from operations in this sector. The fund focuses in acquiring common stocks. The fund may invest in both domestic and foreign instruments.

The fund has a dividend yield of 1.39%. It has an expense ratio of 0.80% as compared to category average of 1.28%. The fund has returned 13.4% year to date.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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