The utilities sector is small. It accounts for just 2.85% of the S&P 500 and only three sectors have smaller weights in the benchmark U.S. equity gauge, but that diminutive status does not diminish the sector’s importance.
The sector and the related utilities exchange-traded funds (ETFs) have been popular destinations for conservative, income-seeking investors. Utilities ETFs are typically less volatile and higher yielding than other sector funds. As a result of those traits, utilities ETFs can be accurate tells regarding investors’ level of risk appetite in various market environments.
Conversely, utilities ETFs and the underlying holdings are, usually, vulnerable to rising interest rates, the scenario confounding investors today. In fact, on a historical basis, no sector is as inversely correlated to rising Treasury yields as utilities.
Confirming the vulnerability of utilities ETFs to Federal Reserve tightening, the S&P 500 Utilities Index is off more than 3% year-to-date, making the sector one of the worst-performing groups in the S&P 500. However, the sector has recently shown signs of life, indicating there could be value to be had in some of the following utilities ETFs.
Best Utilities ETFs: Utilities Select Sector SPDR (XLU)
Expense Ratio: 0.13% annually, or $13 per $10,000 invested
Home to $7.30 billion in assets under management, the Utilities Select Sector SPDR (NYSEARCA:XLU) is the largest utilities ETF by assets. Among utilities ETFs, XLU is the go-to choice for professional investors looking for efficient, highly liquid exposure to the utilities sector, but the fund also has an audience among smaller investors.
XLU lures investors with a trailing 12-month dividend yield of 3.45%, which is nearly 60 basis points above the yield on 10-year Treasuries. This utilities ETF holds 29 stocks and tracks the Utilities Select Sector Index, which is a large-cap utilities benchmark.
XLU delivers “precise exposure to companies from the electric utility, gas utility, multi-utility, and independent power producer and energy trader industries,” according to the issuer.
This is a top-heavy fund as the top five holdings combine for about 40%.
Best Utilities ETFs: Fidelity MSCI Utilities ETF (FUTY)
Expense Ratio: 0.084%
While XLU is the largest utilities ETF, the Fidelity MSCI Utilities ETF (NYSEARCA:FUTY) has the lowest annual fee. With its annual fee of just 0.084%, FUTY is, at least for now, cheaper than even the competing Vanguard fund.
Investors can realize additional cost savings with FUTY because this utilities ETF is available on a commission-free basis to Fidelity clients.
While FUTY and XLU share many of the same holdings, the Fidelity fund offers some differences, including more exposure to smaller utilities stocks and a significantly larger roster. FUTY holds 72 stocks.
FUTY has a trailing price-to-earnings ratio of just under 17 and a trailing 12-month dividend yield of 3.17%, according to issuer data.
Best Utilities ETFs: Reaves Utilities ETF (UTES)
Expense Ratio: 0.95%
Most utilities ETFs are passively managed index funds, but the Reaves Utilities ETF (NASDAQ:UTES) introduces active management to the sector. Given the utilities sector’s history of rate sensitivity, active management can help investors avoid some of the Fed-induced vulnerability this sector often sees.
UTES turns three in December and through its first two years on the market, the advantage of active management was on display as UTES was one of the best-performing utilities ETFs over that period.
The UTES management team employs quantitative and qualitative methodologies to “inform bottom-up security selection through a dynamic investment process emphasizing disciplined risk management,” according to the issuer.
Best Utilities ETFs: Invesco S&P 500 Equal Weight Utilities ETF (RYU)
Expense Ratio: 0.40%
As its name implies, the Invesco S&P 500 Equal Weight Utilities ETF (NYSEARCA:RYU) is an equal-weight spin on a sector that is usually cap-weighted. Equal-weight strategies offer the potential for out-performance of cap-weighted funds, a notion that critics attribute to either the value or size factors.
RYU’s 32 holdings have an average market value of $34.23 billion, which is actually above the $33.82 billion average market capitalization of the cap-weighted XLU’s holdings. None of RYU’s holdings are classified as small-caps, but over 36% of this utilities ETF’s components are considered mid-caps.
Not surprisingly, RYU is likely to outperform large-cap utilities ETFs when mid- and small-cap names are doing the same. For example, the S&P MidCap 400 Index is outperforming the S&P 500 this year, helping RYU perform less poorly than large-cap utilities ETFs. However, over the past three years, large-caps are outperforming mid-caps and RYU is trailing large-cap rivals.
Best Utilities ETFs: Invesco S&P SmallCap Utilities ETF (PSCU)
Expense Ratio: 0.29%
Speaking of smaller utilities stocks, the Invesco S&P SmallCap Utilities ETF (NASDAQ: PSCU) is the small-cap answer to XLU. PSCU follows the S&P SmallCap 600 Capped Utilities & Telecom Services Index, the utilities offshoot of the widely followed S&P SmallCap 600 Index.
This utilities ETF represents an avenue for conservative investors to get involved with small-cap stocks, one of this year’s best-performing asset classes. Due to the conservative nature of the utilities sector, there will be times when PSCU trails broader small-cap benchmarks.
That is the case this year, but the Invesco fund is also easily topping large-cap utilities funds on its way to a year-to-date gain of over 3%. PSCU’s 15 holdings “are principally engaged in providing either energy, water or natural gas utilities, as well as services designed to promote or enhance the transmission of voice, data and video over various communications media, including wireline, wireless (terrestrial-based), satellite and cable,” according to Invesco.
The fund carries a five-star Morningstar rating.
Best Utilities ETFs: Vanguard Utilities ETF (VPU)
Expense Ratio: 0.10%
The Vanguard Utilities ETF (NYSEARCA:VPU) is another venerable option among utilities ETFs. While not as cheap as the aforementioned FUTY, VPU carries a small expense ratio of 0.10%, making it less expensive than 91% of competing funds, according to Vanguard data.
VPU has 74 holdings, a deep bench relative to other options in the utilities space. While this is not the cheapest utilities ETF, VPU offers a more important trait: performance. Over long holding periods, VPU has consistently been one of the best-performing cap-weighted utilities funds.
As of the end of May, VPU’s top 10 holdings combined for nearly half the fund’s weight.
Best Utilities ETFs: iShares Global Utilities ETF (JXI)
Expense Ratio: 0.48%
Investors looking to add some global spice to their utilities holdings may want to consider the iShares Global Utilities ETF (NYSEARCA:JXI). This utilities ETF tracks the S&P Global 1200 Utilities Sector Index and holds 64 stocks.
Global funds are not international funds, meaning there are U.S. stocks in global ETFs like JXI. Domestic utilities represent nearly 59% of this utilities ETF’s weight. Beyond the U.S., 10 other countries, all of which are developed markets, are represented in JXI.
Even with the inclusion of ex-U.S. equities, JXI’s three-year standard deviation is just 12.31%, which is in-line with the MSCI EAFE Index. JXI does not skimp on income with a trailing 12-month dividend yield of 3.67%.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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