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So far in 2012, the stock market has been pretty kind to all stripes of equity investors. Broad markets have surged higher as many have focused in on stronger U.S. data while declining fears over emerging market inflation and European woes have increased risk appetite as well. These factors have led to a solid performance for the S&P 500 as the benchmark has risen by about 7.5% in year-to-date terms (also read Three Cyclical ETFs That Are Surging Higher).
Yet despite these solid gains in many corners of the American market, some haven’t been so lucky. In fact, one of the worst places that investors could have had their money during 2012 has turned out to be in the utilities sector. This traditionally safe place is one of the first spots that investors pile into when they are seeking to avoid risks, but it also seems to be one of the primary cash-out stops for those looking to cycle into higher risk securities when markets are soaring. Thanks to this trend, utilities have failed to keep pace with the broad market gains so far this year, reversing the trend that many have seen over longer time periods (read Are Telecom ETFs In Trouble?).
Seemingly in the utility ETF world, no fund has been immune to the trend as all have tumbled so far in the time period. Nevertheless, despite the high levels of correlation among funds in the sector, there was certainly some variation between performances, a trend that looks likely to continue well into the future no matter how the space performs in the rest of the year. In light of this factor, as well as the traditional strength of the space up until recently, we take a closer look at some of the large cap funds in this space which have been among the hardest hit by the move towards cyclical securities and away from safety:
Focus Morningstar Utilities ETF
For those with a Scottrade account, FUI and the rest of the FocusShares lineup could be the way to go, as these funds all trade commission-free for Scottrade account holders. FUI is ultra-cheap at 19 basis points a year in fees and holds a high amount of securities at 71 in total. Top holdings go towards Southern Corp (SO - Analyst Report) at 7.5% of assets while Dominion Resources (D - Snapshot Report) and Duke Energy (DUK - Analyst Report) each make up another 5.6% of the total as well. Despite the relatively spread out nature of the fund, FUI has had a rough 2012, losing 2.9% so far this year, although this has been better than most in the space in the time frame (see Inside The Forgotten Energy ETFs).
Rydex S&P Equal Weight Utilities Fund (RYU - ETF report)
If investors are partial to equal-weighting—which can often times overweight small caps in relation to their cap-weighted counterparts—RYU is the go to fund in the utilities space. The product holds 40 securities in total while charging half a percent a year in fees, putting it in the middle of the road in the utilities space on both metrics. In terms of holdings, MetroPCS takes the top spot, but it is closely trailed by AES Corp (AES - Analyst Report) and Sprint (S - Analyst Report). Clearly, the fund has a definite tilt towards communication firms, giving it a unique look on the market that includes all types of utilities. However, while the fund may have an interesting methodology, it hasn’t saved it from losses until very recently as the product was in-line with many others but is now one of the better performers in the space, having tumbled by just 1.7% so far this year.
Vanguard Utilities ETF (VPU - ETF report)
Another low-cost option in the utilities sector is VPU, Vanguard’s billion dollar product in the segment. The fund holds more securities than most, 85 in total, while charging a low expense ratio of just 19 basis points a year. Top holdings include the usual suspects like Southern Co and Dominion Resources, but this fund moves Duke Energy down to fourth in favor of Exelon Corp (EXC - Analyst Report). Still, the product has less than 46% of its total assets in the top ten holdings, suggesting that the product is pretty spread out. Unfortunately, this hasn’t helped VPU too much this year, as the product has slumped by 3.1% in year-to-date terms (see Three Outperforming Active ETFs).
Utilities Select Sector SPDR (XLU)
For the largest and cheapest fund in the category, investors should look no further than XLU. This fund has more than $6.7 billion in AUM while the volume is a rather high 8.3 million shares, by far the most in the space. In total, the fund holds 33 securities in its portfolio, giving high levels of exposure to large caps over their small cap brethren. Investors should also note that the fund is slightly more concentrated in its top holdings, putting nearly 55% of its assets in its top ten. Still, this focus on large cap equities hasn’t helped holders of this SPDR in 2012 as the product has tumbled by 3.1% since the start of January.
iShares Dow Jones US Utilities (IDU - ETF report)
iShares, the leader in ETFs by AUM, has a solid entrant in the utilities space as well with its IDU. The fund holds about 70 stocks, and like the rest on this list has a heavy focus on large cap securities. However, investors should note that the fund does charge a hefty premium to many others on the list at 47 basis points a year; ahead of FXU and RYU but behind its pure market cap weighted counterparts. Another important element of the fund is its breakdown between electric utilities on one hand and gas, water, and multiutilities on the other. Currently, the fund has a roughly 70/30 breakdown in favor of electric firms, giving it a slightly different tilt than some products on this list. Possibly thanks to this, IDU has done better than most in the utilities sector as the fund has lost a comparatively good 2.8% since the beginning of the year.
First Trust Utilities AlphaDEX Fund (FXU - ETF report)
For a slightly more active approach in the utilities sector, investors could consider FXU for exposure. The fund utilizes the AlphaDEX methodology which seeks to select stocks based on a variety of value and growth metrics, throwing out the worst rated quarter of all stocks in the universe. For this exposure, the fund charges 70 basis points a year and holds 50 stocks in its basket, figures that differ from many other products on the list. Nevertheless, the fund has lost less than most in the space, slumping by 2.2% in year-to-date terms (see Five ETFs To Buy in 2012).
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Author is long EXC.