Utility services play a vital role in a nation’s economic progress as cheap and abundant supply of power keeps the wheels of development rolling. With development comes the need for more power, as cities expand, and the use of new gadgets increases.
Per U.S. Energy Information Administration (EIA), total energy use in the U.S. will increase to 106.3 quadrillion Btu in 2040 from 95 quadrillion Btu in 2012. Most of this demand is expected to come from the Industrial sector followed by the Commercial sector. (Read: Earnings Will Put These 3 ETFs in Focus This Week)
Even so, the utilities have been under review for a long time. The climate action plan of the U.S. President followed by the U.S. Environmental Protection Agency's (:EPA) proposal for tightening the rules to set up new power plants are putting immense pressure on power producing units.
To meet the stringent regulation, utilities are now gradually shifting their emphasis towards natural gas and alternate energy sources to produce power. The utility operators are also implementing new technologies in generation and distribution of power. The introduction of smart meters will benefit customers while the smart-grid technology is likely to increase efficiency. (Read: 3 MLP ETFs riding out market volatility)
Utilities are by their very nature monopolistic businesses. As a result, the sector is highly regulated as the essential supplies cater to basic human needs, and governments try to ensure the prices of these supplies – water, electricity, etc. – stay within reasonable limits.
The utilities, on the other hand, try to increase prices through the filing of rate cases. The investments and costs incurred for the modernization and maintenance of reliable services are recovered through these rate cases. (Read: 3 Sector ETFs surving the market slump)
Mainly, the steady performance of the companies lures investors to the utility space. The biggest positive for the utilities is that there is hardly any viable substitute for utility services.
ETFs to Tap the Sector
The services provided by utilities are always in demand, while positive movement in the economy tends to increase the demand for utility services. In addition, consistent payment of dividends also makes these ETFs attractive and the defensive nature of operations insulates these ETFs from market turbulence. (See all utility ETFs here)
Below, we highlight 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.
Launched on December 15, 1998, presently XLU has an asset base of $5.4 billion. This fund holds 32 stocks and the top 10 companies hold a 57.77% share of total net assets. The average daily volume (3 months) is 10,068,856 shares. The fund has a dividend yield of 3.65% and an expense ratio of 0.18%.
Among individual holdings, Duke Energy Corporation, NextEra Energy Inc. and Dominion Resources comprising 9.27%, 7.98% and 7.95%, 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 January 15, 2004. Presently this fund manages an asset base of $1.5 billion.
This fund holds 78 stocks and the top 10 companies hold 46.51% of total net assets. The average daily volume (3 months) is 110,519 shares. The product has a dividend yield of 3.57% and an expense ratio of 0.14%
The top three individual holdings in the ETF include Duke Energy Corporation, Dominion Resources and NextEra Energy Inc. with asset allocation of 8.13%, 6.25% and 6.07%, 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 $0.6 billion. Launched on Jun 11, 2000, IDU presently holds 63 companies.
The top 10 companies hold 48.51% of total net assets. The average daily volume (3 months) is 81,492 shares. The fund has a dividend yield of 3.19% and an expense ratio of 0.48%.
Duke Energy Corporation, NextEra Energy Inc. and Dominion Resources comprising 8.34%, 6.62% and 6.59%, respectively, of total net 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. RYU debuted on October 31, 2006, and currently has 38 companies, with the top 10 holdings comprising 28.19% of total net assets. The average daily volume (3 months) is 6,461 shares. The fund has a dividend yield of 3.56% and an expense ratio of 0.50%.
The top three stocks include ONEOK Inc., NiSource Inc. and NextEra Energy Inc. with asset allocation of 3.00%, 2.90% and 2.88%, 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 $126.0 million. The average daily volume (3 months) is 47,047 shares.
The product holds 45 stocks in total in its basket, with the top 10 companies comprising 40.18% of total net assets. The fund has a dividend yield of 3.96% and an expense ratio of 0.70%.
ONEOK Inc., United States Cellular Corporation and Exelon Corp. are the top three holdings with fund allocation of 4.49%, 4.32% and 4.32%, respectively.
PowerShares Dynamic Utilities (PUI)
The ETF is linked to the Dynamic Utilities Indellidex Index. This index evaluates utilities based on its stock valuation, investment timeliness and fundamental strengths. Formed on October 25, 2005, the ETF has assets worth $39.1 million.
The average daily volume (3 months) is 4,944 shares. It is spread across 61 companies with the top 10 holdings comprising 25.64% of total net assets. The fund has a dividend yield of 2.48% and an expense ratio of 0.60%.
The top three stocks include T-Mobile US Inc, Comcast Corp Class A and NextEra Energy Inc., with asset allocation of 2.83%, 2.63% and 2.61%, respectively.
To Sum Up
The biggest positive for the utilities is that there is hardly any viable substitute for utility services. This is the most fundamental strength of the industry. Moreover, increasing demand drives this industry forward.
Despite the assured demand for services, the utilities have to constantly meet the high expectations of its wide customer base, adapt to a changing global economic scenario, and upgrade technologies to meet stringent environmental norms.
We hardly find utilities posting eye-catching numbers, but these companies are generally stable due to the regulated nature of operations, and they are loyal to shareholders. The strength lies in their value and yield. So, investors looking for a steady return on their investments could take a Utility ETF approach.
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- Utility Industry
- Duke Energy Corporation