Utilities stocks are not significant parts of major broad market indices. For example, the utilities sector is barely more than 3% of the S&P 500’s weight. Only two sectors, materials and telecommunications, garner smaller weights in the benchmark U.S. index. And there are no utilities stocks in the Dow Jones Industrial Average nor the NASDAQ-100.
Still, there are reasons that investors like utilities stocks and the corresponding exchange-traded funds. Namely, robust dividend yields and a lack of volatility. For example, the Utilities Select Sector SPDR (XLU), the largest utilities ETF by assets, yields 3.6% on a trailing 12-month basis, or nearly 160 basis points more than 10-year U.S. Treasuries.
However, those juicy yields and relative steadiness also make utilities one of the most boring sectors. Slapped with the label of “bond substitutes,” utilities stocks are often perceived as boring, no-to-slow growth fare. That is, unless Treasury yields are making sharp moves in either direction. Then utilities gain some glamour, but for the most part, this is not the sector for adrenaline junkies.
While the one of the points of utilities investing is avoidance of adrenaline and volatility, there are some ETFs that have the potential to spice up this usually staid sector. Here are some utilities ETFs that are worth your money.
First Trust Utilities AlphaDEX Fund (FXU)
Like the other AlphaDEX ETFs in First Trust’s lineup, the First Trust Utilities AlphaDEX Fund (FXU) selects stocks based “on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,” according to the Illinois-based issuer.
In layman’s terms, that means FXU is a significant departure from the run-of-the-mill utilities ETF. While traditional market capitalization-weighted utilities ETFs often feature large weights to stocks such as Southern Co. (SO) and Duke Energy (DUK), those utilities stocks are not even top-10 holdings in FXU.
Rather, FXU’s top 10 holdings, which combine for approximately 40% of the ETF’s weight, include Calpine (CPN), CenturyLink (CTL) and Frontier Communications (FTR). The good news is income investors aren’t making a large yield sacrifice with FXU, as the ETF has a trailing 12-month yield of 3.56%, according to First Trust data.
The rub with FXU is cost. This avenue to utilities stocks charges 0.7% per year, or $70 for every $10,000 invested. That number does not compare favorably with the Vanguard Utilities ETF (VPU), which charges just 0.12% per year. That cost difference is further magnified when noting FXU only outperformed VPU 37.4% to 34.8% over the past three years.
Reaves Utilities ETF (UTES)
Having debuted last month, the Reaves Utilities ETF (UTES) is the newest kid on the utilities ETF block and the first to be actively managed. That means unlike FXU, the Reaves Utilities ETF does not track an index, but has fund managers overseeing the ETF.
Investors looking for a different approach to utilities stocks should not be deterred by the rookie status held by UTES. Reaves Asset Management has been managing institutional assets for nearly four decades and has five decades of experience in managing utilities stocks though mutual funds and other assets.
According to the fund manager:
“UTES can take advantage of regional variances by overweighting companies in areas with relatively better population growth, weather, and industrial activity. In addition, many utilities are subject to commodity risk exposure related to the prices of electricity, natural gas, and coal. Reaves’ managers can evaluate operating risks arising from non-core activities and balance these risks with timely changes to the UTES portfolio.”
Familiar names found in UTES include Dominion Resources (D) and Nextera Energy (NEE). However, it’s worth pointing out that UTES charges 0.95% per year, or $95 per $10,000 invested. That is pricey, particularly when measured against passive utilities ETFs.
Guggenheim S&P Equal Weight Utilities ETF (RYU)
The $133.6 million Guggenheim S&P Equal Weight Utilities ETF (RYU) is the equal-weight answer to XLU. Equal-weight ETFs are generally considered the forefathers of what is now known as the strategic beta movement, meaning RYU is probably the oldest alternatively indexed avenue to utilities stocks.
RYU is home to 34 stocks, meaning its largest holdings barely exceed weights of 3.3%. Nisource (NI), PPL Corp. (PPL) and Pepco (POM) are among the familiar utilities stocks found in RYU. Those are the ETF’s three largest holdings, and they combine for a little less than 10% of the fund’s weight.
There are plenty of examples of broad market and sector equal-weight ETFs outperforming their cap-weighted rivals, but that isn’t the case with RYU. At least not over the past three years, when RYU has slightly trailed VPU.
However, RYU has proven it can be durable when Treasury yields rise, an important point for utilities investors to consider when mulling ETFs in this environment. RYU gained 14.3% in 2013, the year of the first taper tantrum, and the ETF has easily outpaced FXU and VPU this year. RYU charges 0.4% in expenses.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.