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This Global Utilities ETF Could be at Risk


Some global utilities exchange traded funds have almost kept pace with their U.S.-focused counterparts this year. That is a bonus for income investors willing to embrace international markets because not only have some developed markets utilities moved in near lockstep with their U.S. rivals, global utilities often sport higher dividend yields than their U.S. peers.

Indeed, the outlook for European dividends is encouraging. Payouts from companies in the MSCI Europe ex-U.K. Index will rise 6.8% to $251.2 billion this fiscal year, said research firm Markit. Even European financials, led by French and Swiss firms, are expected to grow their payouts this year. [Bank on European Dividends With These ETFs]

The outlook, however, is not encouraging for all sectors, though. Under pressure from home governments and under duress due to increased regulation, European utilities could see reduced dividends and that could be bad news for the iShares Global Utilities ETF (JXI) .

Home to 72 stocks and an expense ratio of 0.48%, JXI has a trailing 12-month yield of 4.05%, almost 80 basis points above the iShares U.S. Utilities ETF (IDU) .

JXI does allocate 50.1% of its country weight to the U.S. and four U.S.-based companies are found among the ETF’s top-10 holdings. That might not be enough to ward off vulnerability at the hands of falling dividends.

Despite plenty “of dividend cuts in recent years, the yield on the MSCI pan-European utilities index – which compares the size of the most recent payout with the share price” flirted with 7% in late September, Francesco Canepa reported for Reuters.

The yield spike for European utilities could be indicative of one of two things – the stocks are undervalued or poised for dividend reductions. Some market observers believe it is a case of the latter. Analysts cut their 2013 dividend estimates for European utilities by 1.7 percent over the last 30 days, the steepest cut for any European sector and 50 percent more than second-ranked basic materials, according to Reuters.

Some German utilities have already pared dividends and U.K. power firms are seen as vulnerable to heavy regulation. Spanish utilities are not believed to be prime dividend destinations, either. Those three countries combine for nearly 23% of JXI’s weight.

iShares Global Utilities ETF