Utility ETFs To Shelter Portfolio From Market Turmoil

Exchange traded funds (ETFs) not only offer the flexibility of stocks, but also protect investors from market turmoil. Utility ETFs are one of the safest investment options as they include utilities in their portfolio. Utilities are a safe bet given the regulated nature of their business that gives their revenues a high level of certainty. The predominantly domestic focus also shields utilities from foreign currency translation issues. All the utility ETFs discussed below have returned in excess of 14% year to date.

Utilities provide basic services like electricity, gas and water that can never go out of business — this is their most basic fundamental strength. Their ability to boost shareholders’ value through consistent dividend payments makes them all the more attractive. The Dow Jones Utility Average (DJU) is up 13.4% year to date (as of Oct 17, 2016) compared with the S&P 500’s 4.1% return over the same time frame. (Read: 4 ETFs to Hedge Your Portfolio Before Presidential Election)

The utility sector is presently at a crossroads after the release of the new emission standards by the U.S. Environmental Protection Agency. The finalized Clean Power Plan calls for CO2 reduction of 28% by 2025 and 32% by 2030, from 2005 levels. To meet the new emission standards, the utility sector needs to witness the retirement of aged coal plants and higher capital investment in natural gas and alternate energy-fired electricity generation units.

In this context, the Federal Reserve’s cautious monetary stance and its decision to keep the interest rate unchanged have been beneficial for the utilities. However, Fed officials are now hinting at an interest rate hike before the end of this year, provided that overall economic conditions are conducive for such a move. (Read: 9 Ways to Guard Against S&P 500’s Losing Streak)

It’s quite obvious that an interest rate hike will have the biggest impact on utilities among all other sectors as this capital-intensive space requires regular funding for the maintenance and expansion of the existing infrastructure. In addition, adhering to stringent emission norms calls for the extra expenses.

Amid the uncertainties surrounding an interest rate hike, earnings of the utility sector is expected to increase 4.8% in the third quarter of 2016 on 3.9% growth in revenues. In sharp contrast, the S&P 500 is expected to witness an overall earnings decline of 2.9%.

Given the positive sector outlook, now is the right time to focus on utility ETFs that capture the benefits of individual utility stocks and pass them on to the investors.

ETFs to Tap the Sector

The services provided by the utilities are always in demand. 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)

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 15.95% (as of Oct 17, 2016) year to date.

Launched on Dec 15, 1998, XLU has an asset base of nearly $7.5 billion. This fund holds 29 stocks and the top 10 companies occupy a 60.53% share of total assets. The average daily volume (3 months) is 15,441,346 shares. The fund has a dividend yield of 3.44% and an expense ratio of 0.15%.

Among individual holdings, NextEra Energy Inc (NYSE:NEE)., Duke Energy Corporation (NYSE:DUK) and Southern Co., comprising 9.30%, 8.28% and 8.17%, respectively, of total net assets take up the top three spots.

Vanguard Utilities ETF (VPU)

This ETF aims to match the performance of the MSCI US Investable Market Utilities Index. The ETF was launched on Jan 15, 2004. Presently, this fund manages an asset base of $2.2 billion. This fund has returned 16.5% year to date (as of Oct 17, 2016).

This fund holds 81 stocks and the top 10 companies own 50.47% of total assets. The average daily volume (3 months) is 186,380 shares. The fund has a dividend yield of 3.21% and an expense ratio of 0.12%.

The top three individual holdings in the ETF include NextEra Energy Inc., Duke Energy Corporation and Southern Co. with asset allocation of 7.25%, 7.12% and 6.25%, 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 $0.74 billion. Launched on Jun 11, 2000, IDU presently holds 56 companies. This fund has returned 16.1% year to date (as of Oct 17, 2016).

The top 10 companies comprise 51.98% of total assets. The average daily volume (3 months) is 191,758 shares. The fund has a dividend yield of 3.72% and an expense ratio of 0.43%.

NextEra Energy Inc., Duke Energy Corporation and Southern Co., comprising 7.91%, 7.63% and 6.95%, respectively, of total assets, take up the top three spots.

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 $0.2 billion. This fund has returned 14.6% year to date (as of Oct 17, 2016).

RYU debuted on Oct 31, 2006, and currently has 33 companies, with the top 10 holdings comprising 30.96% of total assets. The average daily volume (3 months) is 31,306 shares. The fund has a dividend yield of 3.17% and an expense ratio of 0.40%.

The top three stocks are SCANA Corp, The AES Corporation (NYSE:AES) and Sempra Energy (NYSE:SRE) with asset allocation of 3.14%, 3.12% and 3.12%, respectively.

First Trust Utilities AlphaDEX (FXU)

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 $1.59 billion. The average daily volume (3 months) is 482,673 shares. This fund has returned 17.83% year to date (as of Oct 17, 2016).

The product holds 41 stocks in total in its basket, with the top 10 companies comprising 42.04% of total assets. The fund has a dividend yield of 2.76% and an expense ratio of 0.70%.

Sprint Corp., T-Mobile US Inc. and FirstEnergy Corp (NYSE:FE). are the top three holdings, with fund allocation of 5.15%, 4.70% and 4.16%, respectively.

Fidelity MSCI Utilities ETF (FUTY)

The ETF is linked to the MSCI USA IMI (LON:IMI) Utilities Index, which represents the performance of the utilities sector of the U.S. equity markets. Formed on Oct 21, 2013, the ETF has assets worth $0.23 billion. This fund has returned 16.2% year to date (as of Oct 17, 2016).

The average daily volume (3 months) is 91,167 shares. It is spread across 78 companies with the top 10 holdings comprising 49.66% of total assets. The fund has a dividend yield of 3.35% and an expense ratio of 0.12%.

NextEra Energy Inc., Duke Energy Corporation and Southern Co. are the top three stocks with asset allocation of 7.57%, 7.39% and 6.46%, 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. Launched on Oct 26, 2005, the ETF has assets worth $0.15 billion. This fund has returned 17.4% year to date (as of Oct 17, 2016).

The average daily volume (3 months) is 103,436 shares. It is spread across 34 companies with the top 10 holdings comprising 39.09% of total assets. The fund has a dividend yield of 2.84% and an expense ratio of 0.60%.

Duke Energy Corporation, SCANA Corp. and Sempra Energy are the top three stocks with asset allocation of 4.24%, 4.08% and 4.00%, respectively.

To Sum Up

As per the U.S. Census Bureau, new single-family home sales surged 20.6% year over year in Aug 2016 to 505,000. Recent U.S. Energy Information Administration (EIA) projections, however, indicate that despite the increase in housing permits, retail sales of electricity to the residential sector would dip 0.6% in 2016.

Nevertheless, the EIA forecasts retail electricity sales to the commercial sector to rise 5.8% in 2016. In addition, U.S. industrial sector sales are expected to increase by 19.4% in 2016.

The above data shows ample room for growth for utility operators. So, investing in ETFs that focus primarily on the utility sector could turn out to be a wise decision during such turbulent market conditions.


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SPDR-UTIL SELS (XLU): ETF Research Reports

VIPERS-UTIL (VPU): ETF Research Reports

ISHARS-US UTIL (IDU): ETF Research Reports

GUGG-SP5 EW UTL (RYU): ETF Research Reports

FT-UTIL ALPHA (FXU): ETF Research Reports

FID-UTILITY (FUTY): ETF Research Reports

PWRSH-DW UTL MO (PUI): ETF Research Reports

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