Utilities Plug Away

April 17, 2007

SAN DIEGO (ETFguide.com) - Over the past few years, the dull utilities sector has been turning heads with stock market performance that's been anything but boring.

Through the first quarter of 2007, the Utilities Select Sector SPDR (Amex: XLU), which tracks utility stocks inside the S&P 500, delivered five-year total annualized gains of 11.16 percent. That makes stocks of utility providers one of the best performing S&P sectors over the same time period, along with basic materials and energy.

Utilities generally consist of companies that produce, generate, or distribute electricity or natural gas.

Historically, investors have gravitated to utility stocks for dividends and stability. Regardless of the economy's status, it's generally believed they're insulated from whatever uncertainty may come from uncooperative financial markets. But now, many investors have been looking to utilities for capital growth and they've been getting it.

As utilities have enjoyed strong price appreciation, their dividend yields have decreased. For 2007, the Utilities Select Sector SPDR has a forward yield of just 2.90 percent versus 4.69 percent for the 10-year Treasury bond. Nevertheless, utilities still remain one of the highest dividend paying industry sectors.

According to New York-based AltaVista Independent Research, the Utilities Select Sector SPDR has a P/E ratio of 17 and compared to other industry sectors has lower correlation to the broader S&P 500. Among top holdings in the Utilities SPDR are Exelon, Dominion Resources, Duke Energy, PG&E, Southern and TXU. The fund charges an annual expense ratio of 0.24 percent.

Other exchange-traded funds (ETFs) that track electricity and natural gas stocks are the Vanguard Utilities ETF (Amex: VPU) and the iShares Dow Jones Utilities Index Fund (Amex: IDU). The Vanguard ETF follows the MSCI U.S. Utilities index, which consists of 89 holdings. The fund charges an annual expense ratio of 0.25 percent. The iShares fund has 75 holdings and is at the upper range of cost with an annual expense ratio of 0.48 percent.

Through the first quarter of 2007, the three-year performance for Vanguard Utilities ETF was 21.43 percent, the iShares Dow Jones Utilities Index Fund was 20.89 percent, and the Utilities Select Sector SPDR was 21.63 percent.