Why Utilities ETFs Are So Appealing

May 2, 2019 by Paul Ausick

For investors who want to get a good night’s sleep, utilities have long been offered shelter from the storm. Virtually every person and company in the United States uses electricity or natural gas that is supplied by a utility company.

The ubiquity of energy use yields low-volatility investment options at a stable rate of return. The risks are low and the returns can be competitive with other major companies. NextEra Energy, for example, pays a dividend yield of 2.59%, a fraction higher than industrial giant Caterpillar. And Dominion Energy’s 4.5% yield is nearly twice as much as the 2.28% yield of Dow component United Technologies (UTC).

Total returns are a different story, however. UTC’s stock has added more than 34% so far in 2019, while Dominion’s share price is up by about 8.7%. Over five years, UTC’s share price has risen by about 22% compared to an 11.5% rise in Dominion’s. Tech giants Netflix and Amazon have added more than 720% and 580%, respectively, to their share prices over the same period, but neither pays a dividend. And while it’s hard to imagine now, both Netflix and Amazon could have been flops.

Utilities exchange-traded funds (ETFs) take the conservative approach one step further by accumulating positions in several utilities and further mitigating risk in an already low-risk sector. Bad things can happen even to these low volatility stocks. Exhibit number one is the recent bankruptcy filing of PG&E following two years of disastrous California wildfires.

The trade-off — and there’s always a trade-off — is a low beta. The S&P 500 Index over the past five years has jumped more than 55% while the best performing utilities ETF in our screen posted a five-year share price gain of about 38%.

There is another issue that drives investors into ETFs that culminates much that has been mentioned, but utilities have over the last decade become the new Certificates of Deposit for investors who are seeking yield and low volatility after years of receiving no interest at all from traditional bank-issued CDs and similar vehicles. The median dividend of the 28 utilities in the S&P 500 is about 3.1%, versus about 2.5% for the 10-year and about 2.9% 30-year Treasuries. Investors also assume the value of an equity class will be higher than the current time over a 10-year to 30-year outlook.

In many cases, utility operators may be localized monopolies if they are listed as regulated utilities. The great Warren Buffett loves regulated utilities because of their more easily predictable rates of return.

Here’s a look at three of the ETFs with the vast majority of their assets in utilities. We’ve also included two funds that predominantly hold utilities, but at a far smaller percentage of total fund assets. The five funds are among the top 11 by total assets on the ETF database at ETFdb.com.

The Utilities Select Sector SPDR Fund (NYSEARCA: XLU) holds net assets of around $9.4 billion in a non-diversified fund that tracks the SPDR Utilities Select Sector Index. The fund holds 29 equities, of which 98% are utilities, and nearly a third of its assets are held in five firms: NextEra Energy, Duke Energy, Dominion Energy, Southern Company and Exelon.

The net asset value of the fund at the April 30 close was $58.71 per share. The 52-week range is $48.35 to $59.07. The fund was established in December 1998 and has an expense ratio of just 0.13%. Since its inception, the fund has posted a return of 7.25% and, over the past 10 years, the total return (annualized) is 12.92%. Since the beginning of the year, the fund is up about 12%.

Another ETF heavily weighted toward utilities stocks is the Vanguard Utilities Index Fund ETF Shares (NYSEARCA: VPU), which holds total assets of $4.73 billion. The fund is also a non-diversified ETF and tracks the performance of the MSCI US Investable Market Index/Utilities. Assets are 98% utilities equities spread among 69 different holdings. The top five account for about 34% of the fund’s holdings and include NextEra Energy, Duke Energy, Dominion Energy, Southern Company and Exelon.

The net asset value of this Vanguard fund at the April 30 close was $130.80 per share. The 52-week range is $108.48 to $131.37. The fund was established in January 2004 and has an expense ratio of just 0.13%. Since its inception, the fund has posted a return of 7.25% and, over its lifetime, the total return (annualized) is 10.19%, compared to its underlying index’s return over the same period of 10.36%. Since the beginning of the year, the fund is up about 11.8%.

First Trust Utilities AlphaDEX Fund (NYSEARCA: FXU) is the third-largest utilities ETF and one of two that holds most of its assets in non-utility equities. The fund has about $1.2 billion in assets under management and tracks an equity index called the StrataQuant Utilities Index. Of the fund’s top five holdings, four are telecom providers — United States Cellular (5.76% weighting), Telephone and Data Systems (5.7%), AT&T (5.43%) and CenturyLink (5.24%) — while PPL (4.74%) is the largest utility by weight. In all, 63% of the fund’s 35 holdings are utilities stocks and 33% are telecom stocks.

The net asset value of the fund at the April 30 close was $28.39 per share. The 52-week range is $24.95 to $29.08. The fund was established in May 2007 and has an expense ratio of 0.63%. Since its inception, the fund has returned 6.19%, compared to a 7.06% return on its underlying index. The fund’s one-year return as of the end of March was 14.2%.

The iShares U.S. Utilities ETF (NYSEARCA: IDU) holds about $796 million in assets under management. of which 98% are utilities stocks. It is a non-diversified fund that was created in June 2000. The fund seeks to track the Dow Jones U.S. Utilities Index. The top five holdings are NextEra Energy, Duke Energy, Dominion Energy, Southern Company and Exelon.

The fund’s net asset value was $148.63 per share on April 30, and the 52-week range is $123.24 to $149.41. The expense ratio is 0.43% and, since its inception, the fund has returned 7.48%, compared to a return of 7.98% for the underlying benchmark. Over the past year, the fund has returned 19.01%.

Cushing Utility & MLP ETF (NYSEARCA: XLUY) has a total of about $2.6 million in assets under management and is the smallest of the funds we’ve looked at here. The fund is non-diversified and seeks to track the results of the Cushing Utility Index. Just over three-quarters (76%) of its holdings are utilities stocks. Master limited partnerships — primarily oil and gas pipeline companies — comprise 19% of the stocks holdings. The fund’s top five holdings are PPL, Southern Company, Dominion Energy, Duke Energy and Entergy.

This fund’s net asset value was $26.21 on April 30, and the 52-week range is $22.65 to $26.70. The fund was created in December 2018 and has an expense ratio of 0.65%, the highest in this group. Since its inception, the fund has returned 6.9%. There are currently 40 equities included in the fund.

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