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Utility ETFs Draw Attention Amid Shift to Clean Sources

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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.

Utility operators are gradually changing the source of electricity production. Abundant cheap natural gas and declining installation costs of renewable sources like solar and wind are acting as tailwinds for the sector. The regulated utilities are also getting ample support from the administration to shut down old and less profitable fossil fuel plants and replace them with more technologically sound new generation units.

Apart from generating electricity from clean sources, utilities are also focused 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. There is increasing focus on electricity storage facilities that will provide more support to the grid during a peak demand period.

These capital intensive utilities therefore routinely take recourse to capital markets to meet the above requirements. Though regulated utilities are cash generators, the funds from internal sources are not sufficient to carry out long-term projects.

The rise in Fed interest rates six times since December 2015 is going to hurt utilities. We believe that a rising interest rate environment could add to the woes of utility operators, as it will increase the cost of capital, and restrain their ability to consistently pay out dividends.

First-quarter earnings of the utility sector are expected to increase 19% on the back of 4.0% revenue growth. Cost control, new electric rates and customer growth will help the utility sector to come up with earnings growth in the first-quarter reporting cycle.  On the other hand, earnings from the S&P 500 members are expected to improve 23.2% on the back of 8.7% revenue growth.

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 investments 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 2.34% for the last 12 months.

The fund has an asset base of nearly $7.3 billion. It holds 29 stocks and the top 10 companies occupy 60.69% share of its total assets. It has an average daily volume (three months) of 17,036,876 shares. The fund has a dividend yield of 3.40% and an expense ratio of 0.13%.

The top three holdings in the ETF are NextEra Energy Inc., Duke Energy Corporation and Southern Co., with asset allocation of 11.76%, 8.52% and 7.01%, 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 $2.62 billion and has returned 3.92% in the past 12 months.

This fund holds 74 stocks and the top 10 companies own 49.64% of total assets. The average daily volume (three months) is 167,560 shares. The fund has a dividend yield of 3.14% 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 9.68%, 7.01% and 5.75%, 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 $0.61 billion. IDU holds 53 companies and has returned 3.09% in the past 12 months.

The top 10 companies comprise 51.47% of total assets. The average daily volume (three months) is 53,742 shares. The fund has a dividend yield of 2.68% 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 9.97%, 7.22% and 5.95%, 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 $0.14 billion. This fund has returned 3.03% in the trailing 12 months.

RYU currently has 32 companies, with the top 10 holdings comprising 34.02% of total assets. The average daily volume (three months) is 7,295 shares. The fund has a dividend yield of 3.28% and an expense ratio of 0.40%.

The top three stocks are NRG Energy, AES Corporation, and NiSource Inc. with asset allocation of 3.55%, 3.53% and 3.43%, respectively.

First Trust Utilities AlphaDEX (FXU)

FXU seeks investment that corresponds generally to the price and yield of the StrataQuant Utilities AlphaDex Index. The fund manages an asset base of $0.27 billion. The average daily volume (three months) is 110,513 shares. This fund has provided a negative return of 0.6% over the past 12 months.

The product holds 36 stocks in total, with the top 10 companies accounting for 45.24% of total assets. The fund has a dividend yield of 3.70% and an expense ratio of 0.62%.

CenturyLink Inc., Sprint Corp., and Exelon Corp. are the top three holdings, with 5.25%, 5.01% and 4.94% allocation, respectively.

Fidelity MSCI Utilities ETF(FUTY)

The ETF is linked to the MSCI USA IMI Utilities index, which represents the performance of the utility sector of the U.S. equity markets. The fund has assets worth $0.31 billion. FUTY has returned 3.82% in the past 12 months.

The average daily volume (three months) is 72,360 shares. It is spread across 74 companies with the top 10 holdings comprising 49.55% of total assets. The fund has a dividend yield of 3.15% 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 9.66%, 7.00% and 5.74%, respectively.

PowerShares DWA Utilities Momentum ETF (PUI)

PUI seeks investment that generally corresponds (before fees and expenses) to the price and yield of the Dorsey Wright Utilities Technical Leaders index. The ETF has assets worth $0.05 billion. It has returned 2.48% in the past 12 months.

The average daily volume (three months) is 6,066 shares. It is spread across 31 companies with the top 10 holdings comprising 37.17% of total assets. The fund has a dividend yield of 2.66% and an expense ratio of 0.60%.

NRG Energy Inc, ONEOK Inc. and NiSource Inc., are the top three stocks with asset allocation of 3.96%, 3.82% and 3.75%, respectively.

 

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