Utility ETFs are safe havens by virtue of the regulated nature of their stocks’ business. The predominant domestic focus also shields utilities from foreign currency translation issues.
Utilities provide basic services like electricity, gas and water that can never go out of business. Their ability to boost shareholders’ value through consistent dividend payments makes them all the more attractive.
Over the last few years, we have noticed that utilities are changing their preference of fuels in producing electricity. In the United States, natural gas currently contributes the largest portion of the fuel mix and has removed coal from the top spot. (Read: Tech ETFs—Is the Stellar Run Over?)
Utilities, apart from generating electricity, focus on strengthening transmission and distribution lines. Meanwhile, natural gas utilities depend on pipelines to deliver the product to end users. Water utilities are also required to upgrade and replace old pipelines and water mains. So, to upgrade and strengthen the existing infrastructure, utilities depend on capital markets.
Though regulated utilities are cash generators, the funds generated from internal sources are not sufficient to carry out long-term projects. Utilities have been benefiting from the rock-bottom interest rate environment. However, the Fed raised interest rates for three consecutive quarters (December 2016, March 2017 and June 2017), which will certainly hurt utilities.
The rise in interest cost will no doubt increase the cost of capital for utilities and might limit their ability to pay dividend and buy back shares. These developments could lower the attractiveness of utilities and investors might turn to bonds as alternative sources of investment.
Second-quarter earnings in the utility space increased 7% on the back of 7.7% revenue growth. Earnings from the utility sector are expected to increase 2% on the back of a 4.5% improvement in total revenues in 2017 (Read: Top and Flop Zones of Q3 and Their ETFs)
Given the stable performance of utilities, the time is ripe to focus on utility ETFs that cash in on the benefits of individual utility stocks and pass them on to investors.
ETFs to Tap the Sector
The defensive nature of utilities insulates the related ETFs from market turbulence (see all utility ETFs here). Below we have focused on ETFs with holdings from the utility sector that have a U.S. bias.
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. The index includes communications services, electrical power providers and natural gas distributors. This fund has returned 15.1% in the last 12 months.
The fund has an asset base of nearly $7.8 billion. It holds 29 stocks and the top 10 companies occupy a 60.6% share of its total assets. It has an average daily volume (three months) of 10,552,663 shares. The fund has a dividend yield of 3.09% and an expense ratio of 0.14%.
The top three holdings in the ETF are NextEra Energy Inc., Duke Energy Corporation and Southern Co. with asset allocation of 10.19%, 8.17% and 7.30%, respectively.
Vanguard Utilities ETF (VPU)
This ETF aims to match the performance of the MSCI US Investable Market Utilities Index. Presently, this fund manages an asset base of $2.77 billion and has returned 16.77% in the last 12 months.
This fund holds 75 stocks and the top 10 companies own 50.46% of total assets. The average daily volume (three months) is 105,477 shares. The fund has a dividend yield of 3.03% and an expense ratio of 0.10%.
The top three individual holdings in the ETF are NextEra Energy Inc., Duke Energy Corporation and Southern Co. with asset allocation of 8.44%, 7.34% and 6.05%, 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 ETF manages an asset base of $0.94 billion. IDU holds 53 companies and has returned 15.89% in the last 12 months.
The top 10 companies comprise 52.37% of total assets. The average daily volume (three months) is 77,688 shares. The fund has a dividend yield of 2.91% and an expense ratio of 0.44%.
The top three individual holdings in the ETF are NextEra Energy Inc., Duke Energy Corporation and Southern Co. with asset allocation of 8.73%, 7.59% and 6.26%, 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 Index. The ETF manages an asset base of $0.19 billion. This fund has returned 12.30% in the trailing 12 months.
RYU currently has 33 companies, with the top 10 holdings comprising 33.21% of total assets. The average daily volume (three months) is 10,652 shares. The fund has a dividend yield of 2.95% and an expense ratio of 0.40%.
The top three stocks are NRG Energy Inc., FirstEnergy Corp., and CenterPoint Energy Inc. with asset allocation of 4.19%, 3.32% and 3.27%, 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 manages an asset base of $1.34 billion. The average daily volume (three months) is 235,465 shares. This fund has returned 10.29% in the last 12 months.
The product holds 37 stocks in total, with the top 10 companies accounting for 43.75% of total assets. The fund has a dividend yield of 2.76% and an expense ratio of 0.62%.
Avangrid Inc. PG&G Corp. and Exelon Corporation are the top three holdings, with 4.98%, 4.90% and 4.83% allocation, respectively.
Fidelity MSCI Utilities ETF(FUTY)
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. The fund has assets worth $0.31 billion. FUTY has returned 15.75% in the last 12 months.
The average daily volume (three months) is 69,911 shares. It is spread across 76 companies with the top 10 holdings comprising 50.24% of total assets. The fund has a dividend yield of 3.01% and an expense ratio of 0.08%.
NextEra Energy Inc., Duke Energy Corporation and Southern Co. are the top three stocks with asset allocation of 8.40%, 7.31% and 6.02%, respectively.
PowerShares DWA Utilities Momentum ETF (PUI)
PUI seeks investment results that generally correspond (before fees and expenses) to the price and yield of the Dorsey Wright Utilities Technical Leaders Index. The ETF has assets worth $0.06 billion. It has returned 18.71% in the last 12 months.
The average daily volume (three months) is 22,600 shares. It is spread across 38 companies with the top 10 holdings comprising 35.70% of total assets. The fund has a dividend yield of 3.57% and an expense ratio of 0.60%.
PG&E Corp, Edison International and CMS Energy Corp. are the top three stocks with asset allocation of 3.94%, 3.74% and 3.66%, respectively.
To Sum Up
Despite the drawbacks of the utility sector, it is still undoubtedly one of the most stable industries to invest in. It has gained 6.8% in the last 12 months compared with the S&P 500’s returns of 16.2%.
Tapping into the returns of the best utilities via ETFs could lead to stability and dividend. Out of the seven utility funds mentioned above, five have returned more than 15% in last 12 months.
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Utility ETFs to Safeguard Your Portfolio
Utility ETFs are safe havens by virtue of the regulated nature of their stocks’ business. The predominant domestic focus also shields utilities from foreign currency translation issues.
Utilities provide basic services like electricity, gas and water that can never go out of business. Their ability to boost shareholders’ value through consistent dividend payments makes them all the more attractive.
Over the last few years, we have noticed that utilities are changing their preference of fuels in producing electricity. In the United States, natural gas currently contributes the largest portion of the fuel mix and has removed coal from the top spot. (Read: Tech ETFs—Is the Stellar Run Over?)
Utilities, apart from generating electricity, focus on strengthening transmission and distribution lines. Meanwhile, natural gas utilities depend on pipelines to deliver the product to end users. Water utilities are also required to upgrade and replace old pipelines and water mains. So, to upgrade and strengthen the existing infrastructure, utilities depend on capital markets.
Though regulated utilities are cash generators, the funds generated from internal sources are not sufficient to carry out long-term projects. Utilities have been benefiting from the rock-bottom interest rate environment. However, the Fed raised interest rates for three consecutive quarters (December 2016, March 2017 and June 2017), which will certainly hurt utilities.
The rise in interest cost will no doubt increase the cost of capital for utilities and might limit their ability to pay dividend and buy back shares. These developments could lower the attractiveness of utilities and investors might turn to bonds as alternative sources of investment.
Second-quarter earnings in the utility space increased 7% on the back of 7.7% revenue growth. Earnings from the utility sector are expected to increase 2% on the back of a 4.5% improvement in total revenues in 2017 (Read: Top and Flop Zones of Q3 and Their ETFs)
Given the stable performance of utilities, the time is ripe to focus on utility ETFs that cash in on the benefits of individual utility stocks and pass them on to investors.
ETFs to Tap the Sector
The defensive nature of utilities insulates the related ETFs from market turbulence (see all utility ETFs here). Below we have focused on ETFs with holdings from the utility sector that have a U.S. bias.
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. The index includes communications services, electrical power providers and natural gas distributors. This fund has returned 15.1% in the last 12 months.
The fund has an asset base of nearly $7.8 billion. It holds 29 stocks and the top 10 companies occupy a 60.6% share of its total assets. It has an average daily volume (three months) of 10,552,663 shares. The fund has a dividend yield of 3.09% and an expense ratio of 0.14%.
The top three holdings in the ETF are NextEra Energy Inc., Duke Energy Corporation and Southern Co. with asset allocation of 10.19%, 8.17% and 7.30%, respectively.
Vanguard Utilities ETF (VPU)
This ETF aims to match the performance of the MSCI US Investable Market Utilities Index. Presently, this fund manages an asset base of $2.77 billion and has returned 16.77% in the last 12 months.
This fund holds 75 stocks and the top 10 companies own 50.46% of total assets. The average daily volume (three months) is 105,477 shares. The fund has a dividend yield of 3.03% and an expense ratio of 0.10%.
The top three individual holdings in the ETF are NextEra Energy Inc., Duke Energy Corporation and Southern Co. with asset allocation of 8.44%, 7.34% and 6.05%, 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 ETF manages an asset base of $0.94 billion. IDU holds 53 companies and has returned 15.89% in the last 12 months.
The top 10 companies comprise 52.37% of total assets. The average daily volume (three months) is 77,688 shares. The fund has a dividend yield of 2.91% and an expense ratio of 0.44%.
The top three individual holdings in the ETF are NextEra Energy Inc., Duke Energy Corporation and Southern Co. with asset allocation of 8.73%, 7.59% and 6.26%, 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 Index. The ETF manages an asset base of $0.19 billion. This fund has returned 12.30% in the trailing 12 months.
RYU currently has 33 companies, with the top 10 holdings comprising 33.21% of total assets. The average daily volume (three months) is 10,652 shares. The fund has a dividend yield of 2.95% and an expense ratio of 0.40%.
The top three stocks are NRG Energy Inc., FirstEnergy Corp., and CenterPoint Energy Inc. with asset allocation of 4.19%, 3.32% and 3.27%, 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 manages an asset base of $1.34 billion. The average daily volume (three months) is 235,465 shares. This fund has returned 10.29% in the last 12 months.
The product holds 37 stocks in total, with the top 10 companies accounting for 43.75% of total assets. The fund has a dividend yield of 2.76% and an expense ratio of 0.62%.
Avangrid Inc. PG&G Corp. and Exelon Corporation are the top three holdings, with 4.98%, 4.90% and 4.83% allocation, respectively.
Fidelity MSCI Utilities ETF(FUTY)
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. The fund has assets worth $0.31 billion. FUTY has returned 15.75% in the last 12 months.
The average daily volume (three months) is 69,911 shares. It is spread across 76 companies with the top 10 holdings comprising 50.24% of total assets. The fund has a dividend yield of 3.01% and an expense ratio of 0.08%.
NextEra Energy Inc., Duke Energy Corporation and Southern Co. are the top three stocks with asset allocation of 8.40%, 7.31% and 6.02%, respectively.
PowerShares DWA Utilities Momentum ETF (PUI)
PUI seeks investment results that generally correspond (before fees and expenses) to the price and yield of the Dorsey Wright Utilities Technical Leaders Index. The ETF has assets worth $0.06 billion. It has returned 18.71% in the last 12 months.
The average daily volume (three months) is 22,600 shares. It is spread across 38 companies with the top 10 holdings comprising 35.70% of total assets. The fund has a dividend yield of 3.57% and an expense ratio of 0.60%.
PG&E Corp, Edison International and CMS Energy Corp. are the top three stocks with asset allocation of 3.94%, 3.74% and 3.66%, respectively.
To Sum Up
Despite the drawbacks of the utility sector, it is still undoubtedly one of the most stable industries to invest in. It has gained 6.8% in the last 12 months compared with the S&P 500’s returns of 16.2%.
Tapping into the returns of the best utilities via ETFs could lead to stability and dividend. Out of the seven utility funds mentioned above, five have returned more than 15% in last 12 months.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>