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Plugging into Utility ETFs
By Ron DeLegge, Editor
January 27, 2009
SAN DIEGO (ETFguide.com) – Ten years ago, investing in young companies involved in developing industry sectors was the fast road to riches. As it turns out, it also became the quick road to poverty. The number of investors that lost money from failed start-ups well exceeded the tiny handful of winners.
In today’s tough economic times, investors aren’t looking for new and exciting, but for old and boring. Simply put, they want stability in these unstable times. Where can you go?
Take a look at utility stocks. So far in 2009, the Dow Jones Industrial Average (NYSEArca: DIA) has already declined by 7.37% and the S&P 500 (AMEX: SPY) is down 7.27%. In contrast, S&P utilities have bucked the downward trend by posting modest gains.
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The utilities sector encompasses companies involved in producing or distributing electrical power, natural gas, and water.
Here is a short list of four utility ETFs:
Utilities Select Sector SPDR (NYSEArca: XLU) +1.50% (YTD Gain)*
This ETF follows utility stocks within the S&P 500. The utilities industry accounts for 4.60% of the S&P 500’s overall sector weighting, making it the second smallest sector within the index just behind basic materials. With just under $2 billion in assets, XLU is the largest utilities ETF. There are 33 utility stocks inside XLU.
In 2008, XLU declined by 29.09% compared to a 38.49% fall in the S&P 500. Exelon (11.14%), Southern Co. (8.11%), and Dominion Resources (6.23%) represent the fund’s three largest holdings in order. XLU’s annual expense ratio is currently 0.23%, but there’s good news for ETF investors. XLU’s 12-month yield is currently 4.2% and the fund’s annual expenses are being cut to 0.21% beginning 1/31/09.
Vanguard Utilities ETF (NYSEArca: VPU) +0.52% (YTD Gain)
This Vanguard ETF follows the MSCI US Investable Market Utilities Index. The fund has around $289 million in assets and this particular utility ETF is the most diversified among similar offerings. VPU currently has 84 stocks and the median market size of utilities stocks within VPU is $10.7 billion.
In 2008, VPU declined by 28.04% compared to a 38.49% fall in the S&P 500. Exelon (8.70%), Southern Co. (6.10%), and Dominion Resources (5.20%) represent the fund’s three largest holdings in order. VPU’s 12-month yield is currently 3.9% and the fund’s annual expense ratio is 0.25%.
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Rydex S&P Equal Weight Utilities ETF (NYSEArca: RYU) +2.71% (YTD Gain)
This ETF shadows utility stocks within the S&P 500, but with a twist. Instead of weighting the companies by their market capitalization or size, it weights each stock equally. The net effect of equal weighting a stock index is a bias towards mid and small company stocks.
In 2008, RYU declined by 30.81% compared to a 38.49% fall in the S&P 500. Each one of the 33 stocks within RYU receives an equal weighting and the underlying index is rebalanced every quarter. RYU’s 12-month yield is currently 4.7% and the fund’s annual expense ratio is 0.50%.
PowerShares Dynamic Utilities Sector Portfolio (NYSEArca: PUI) -2.55% (YTD Gain)
This PowerShares Utilities ETF is more of a portfolio strategy than a market index based strategy. Put another way, PUI isn’t just attempting to match the performance of major utility equity benchmarks, it’s trying to outperform them. Stocks within this ETF are selected using a secretive quantitative formula that screen for factors like fundamental growth and valuation.
In 2008, PUI declined by 20.51% compared to a 38.49% fall in the S&P 500. Each one of the 30 utility stocks within PUI receives a modified equal weighting and the underlying index is rebalanced every quarter. PUI’s 12-month yield is currently 2.9% and the fund’s net annual expense ratio is 0.64%.
Utilities vs. Bonds
Low interest rates are forcing investors to look beyond low yielding money market rates and bank CDs for income. To meet your income needs you need to use the right investment products.
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Below is an excerpt from the ETF Profit Strategy Newsletter – Published on Oct.21, 2008
At the time, the Dow was above 9,000. It dropped below 7,500 and rallied into Nov./Dec
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Market Meter
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Short-Term: published on Oct. 21, 2008
The Dow should find a “trade-able bottom” between 7200 – 7,500
Mid-Term: published on Oct. 21, 2008
Once bottomed, the stock markets will rally into Nov/Dec
Long-Term: >> Sign up to find out
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How did you do? >> Sign up for the ETF Profit Strategy Newsletter to be a step ahead
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Utility ETFs are an excellent choice to help you build the income portion or your investment portfolio. In many cases investors can net more income from the dividends paid by utility ETFs. Why? Because the qualified dividend income is taxed at a maximum rate of 15% (or to 5% for taxpayers in the lowest two tax brackets) whereas the taxable income from bonds is taxed at higher ordinary income rates. Even though utility ETFs posted negative performance last year, they are among the best performing industry sectors so far in the early going of 2009.
Which utility ETFs are right for you? And which ones best represent the utilities sector? In our January 22nd ETF picks we profiled one utility fund we believe can do well even during difficult economic times like this. Knowledge is power, so check it out.
*Performance through 1/26/09 market close
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