A Beginner's Guide To Utility ETFs
Undoubtedly, utility services play an important role in the economic progress of a nation. Like every other sector, the demand for utility services fluctuates with the health of the broader economy. The extent of demand for electricity, gas and water varies with the swings of the economy, but these companies providing basic services can never go out of business. This is their most basic fundamental strength. (Read: 3 ETFs Leading the Technology Sector Surge)
Utility stocks are also considered as a safe investment bet given the regulatory nature of business and domestic focus. The capital intensive utility sector has done well in the last 12 months aided by lower interest rates and an ongoing improvement in the U.S. economy that led to more jobs and higher housing unit completion.
Per a release from the U.S. Department of Housing and Urban Development, nearly 883,000 housing units were completed in 2014, increasing 15.5% from 2013 levels. This data combined with the U.S. Energy Information Administration’s (EIA) projection of a 1.1% and 0.9% respective increase in electricity generation in 2015 and 2016 bodes well for the utility sector going forward.
The U.S. economy has also improved remarkably with the latest release from the Bureau of Labor Statistics showing that in Dec 2014, 42 states and the District of Columbia saw a decline in the unemployment rate from the prior month, while four states witnessed rising unemployment. (Read:Bet on the American Consumer with these ETFs)
The utility industry has evolved over the decades with increasing industrialization and population growth spurring power demand. However, the price for this unrestricted expansion in the utility space has been heavy, particularly in terms of greenhouse gas emissions.
The utilities on their part have proactively responded to environment-related criticisms, investing in technologies to meet stringent regulations. As a blessing in disguise, they’ve been compelled to develop new technologies to produce power at cheaper rates and boost their renewable portfolio. Also, the shale boom in the U.S., supported by the clean burning nature of natural gas, has resulted in its increasing uptake for power generation. An EIA report projects natural gas based generation rising from 27.3% of total generation in 2014 to 28.1% in 2016.
From an investment perspective, utilities have traditionally been the safest bet amid market fluctuation due to their defensive nature of operations. Besides offering steady returns, utilities diligently share profits with their shareholders through regular dividend payments and share buybacks.
Mainly, the steady performance of these companies lures investors to the utility space. Investment in the following ETFs, which primarily deal with the U.S. utilities, ensures a steady return even in a choppy market (read: 3 Utility ETFs Surging to Start 2015).
ETFs to Tap the Sector
The services provided by the utilities are always in demand. Added to this any positive movement in the economy tends to increase the demand for utility services. The defensive nature of operations insulates these ETFs from market turbulence (see all utility ETFs here).
Below, we have focused on the ETFs in the utility sector which primarily have a U.S. bias.
Utilities Select Sector SPDR (XLU - ETF report) – ETF report)
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. The index includes communications services, electrical power providers and natural gas distributors.
Launched on December 15, 1998, XLU has an asset base of nearly $8 billion. This fund holds 31 stocks and the top 10 companies occupy a 59.17% share of total net assets. The average daily volume (3 months) is 13,784,335 shares. The fund has a dividend yield of 3.26% and an expense ratio of 0.15%.
Among individual holdings, Duke Energy Corporation, NextEra Energy Inc. and Southern Co., comprising 9.42%, 7.90% and 7.56%, respectively, of total net assets take up the top three spots.
Vanguard Utilities ETF (VPU - ETF report) – ETF report)
This ETF aims to match the performance of the MSCI US Investable Market Utilities Index. The ETF was launched on January 15, 2004. Presently this fund manages an asset base of $2.15 billion.
This fund holds 79 stocks and the top 10 companies form 47.98% of total net assets. The average daily volume (3 months) is 205,054 shares. The fund has a dividend yield of 3.09% and an expense ratio of 0.14%.
The top three individual holdings in the ETF include Duke Energy Corporation, NextEra Energy Inc. and Dominion Resources Inc. with asset allocation of 8.05%, 6.32% and 6.11%, respectively.
iShares Dow Jones US Utilities (IDU - ETF report) – ETF report)
The fund seeks to match the performance and yield of the Dow Jones U.S. Utilities Sector Index. The ETF manages an asset base of $2.04 billion. Launched on June 11, 2000, IDU presently holds 61 companies.
The top 10 companies comprise 49.79% of total net assets. The average daily volume (3 months) is 433,083 shares. The fund has a dividend yield of 2.95% and an expense ratio of 0.46%.
Duke Energy Corporation, NextEra Energy Inc. and Southern Co., comprising 8.40%, 6.57% and 6.29%, respectively, of total net assets take up the top three spots.
Guggenheim S&P 500 Eq Weight Utilities (RYU - ETF report) – ETF report)
The fund seeks to replicate the performance of the S&P 500 Equal Weighted Telecommunication Services and Utilities Sector Index. The ETF manages an asset base of $0.3 billion.
RYU debuted on October 31, 2006, and currently has 35 companies, with the top 10 holdings comprising 29.10% of total net assets. The average daily volume (3 months) is 55,256 shares. The fund has a dividend yield of 3.22% and an expense ratio of 0.40%.
The top three stocks include PG&E Corporation, CMS Energy Corp, and SCANA Corp. with asset allocation of 2.97%, 2.96% and 2.96%, respectively.
First Trust Utilities AlphaDEX (FXU - ETF report) – ETF report)
FXU seeks investment results that correspond generally to the price and yield of the StrataQuant Utilities AlphaDex Index. Launched on May 7, 2007, the fund manages an asset base of $0.8 billion. The average daily volume (3 months) is 738,803 shares.
The product holds 42 stocks in total in its basket, with the top 10 companies comprising 39.64% of total net assets. The fund has a dividend yield of 2.14% and an expense ratio of 0.70%.
Great Plains Energy Inc., Sprint Corporation and Public Service Enterprise Group Inc. are the top three holdings with fund allocation of 4.30%, 4.28% and 4.25%, respectively.
Fidelity MSCI Utilities ETF (FUTY – ETF report)
The ETF is linked to the MSCI USA IMI Utilities Index, which represents the performance of the utilities sector of the U.S. equity markets. Formed on October 21, 2013, the ETF has assets worth $0.3 billion.
The average daily volume (3 months) is 177,214 shares. It is spread across 80 companies with the top 10 holdings comprising 47.98% of total net assets. The fund has a dividend yield of 3.11% and an expense ratio of 0.12%.
The top three stocks include Duke Energy Corporation, NextEra Energy Inc. and Southern Co., with asset allocation of 8.21%, 6.35% and 6.05%, respectively.
To Sum Up
All the Utility ETFs mentioned above have registered an increase in AUM and trading volume over the last three months. The ongoing improvement in the U.S. economy has led to lower unemployment levels and a rising demand for utility services. The utilities are coming out with strong performances and the benefits are also reflected in the sector ETFs.
Moreover, the EIA projects a favorable price dynamics for the utilities apart from higher demand. The U.S. retail residential price is projected to increase 1.1% in 2015 and 1.8% in 2016.
In the end, the strength of the utilities lies in their value and yield. So, investors looking for a steady return on their investments could take a utility ETF approach.
Disclosure: Zacks.com contains statements and ...
more