Investors see utility stocks as a safe haven, with a history of high dividend yields and regulated business models that ensure modest but sustained profitability. With many parts of the utility industry having been deregulated, however, some utility investors have had to get used to the idea that stocks in the sector can be more volatile than in the past. Investing in exchange-traded funds that specialize in utilities lets you avoid company-specific risk and give you exposure to the entire industry. The following five utility ETFs have attracted the most interest from those who follow the utility sector, and their combination of income and growth are attractive to their shareholders.
|
Utility ETF |
Assets Under Management |
Expense Ratio |
5-Year Average Annual Return |
|---|---|---|---|
|
Utility Select Sector SPDR (XLU 0.18%) |
$6.9 billion |
0.14% |
12.5% |
|
Vanguard Utilities (VPU 0.14%) |
$2.5 billion |
0.10% |
11.6% |
|
iShares Global Infrastructure (IGF 0.19%) |
$1.7 billion |
0.47% |
10.1% |
|
First Trust Utilities AlphaDEX (FXU -0.32%) |
$1.4 billion |
0.62% |
14% |
|
iShares U.S. Utilities (IDU -0.83%) |
$771 million |
0.44% |
12.8% |
Data source: Fund providers.
A simple index approach to utilities
Most ETFs are index funds, tracking a given benchmark and seeking to match its performance over time. Utility ETF benchmarks tend to have a variety of different types of utilities within them, including electric, water, and gas utilities. Some companies offer multiple utility services to their customers, and funds also typically own shares of independent power producers that focus on generation rather than transmission.
Most of the ETFs on the preceding list have a fairly broad focus. The Utility Select SPDR has more than 60% of its money invested in electric utilities, with most of the rest in utilities that offer multiple services. Water and independent power producers make up only a tiny fraction of the fund. The ETF's current dividend yield of 3.3% is well above the overall market's average and shows the income potential from utilities. You'll find 30 utility stocks within the fund's holdings.
The Vanguard Utility ETF has a similar breadth of exposure, with electric and multi-utility companies making up almost 90% of fund assets. Gas, water, and independent power utilities make up the remaining tenth or so of the ETF, and among top holdings are some of the largest utility companies in the U.S. market. The fund owns more than 75 stocks and has an SEC yield of 3.2%.
The iShares U.S. Utilities ETF has a higher expense ratio than the Vanguard and SPDR ETFs, but its returns have been better even after taking those higher fees into account. Holdings aren't markedly different from the other all-purpose utility ETFs in the sector, but the index that it tracks has done better than those of its counterparts. Yield is 2.7% currently.
Image source: Getty Images.
A bigger-picture view
In the U.S., people take utilities for granted, but in much of the world, growth in utilities in just one part of the overall issue of improving infrastructure. The iShares Global Infrastructure ETF has as its goal investing in companies in the transportation, communications, water, and electric services businesses. Unlike the other ETFs listed, this fund has a global scope, and you'll find companies from across the globe among its holdings. The top five positions in the fund are held by non-U.S. stocks, and only three of the top 10 stocks are actually utility companies. Yet the fund still yields 2.8%. If you like having utility exposure as part of a broader portfolio that also includes industrial, energy, and construction stocks, then this ETF has big advantages over its peers.
Finally, the First Trust Utilities AlphaDEX ETF takes a slightly different angle on the sector, including telecommunications companies within the scope of utilities. Even having just a quarter of its assets in telecom is enough to change the performance characteristics markedly, but the First Trust ETF also aims to offer a better risk-reward proposition for its investors. The fund weights its holdings based on its AlphaDEX stock selection methodology, which involves ranking stocks on growth factors that include sales growth, price-to-sales ratio, book value, cash flow, and return on assets. Stocks are divided into five categories, and each stock within a category gets the same weight, with better categories getting heavier weightings than worse categories. The ETF boasts a 2.9% yield.
Find the right utility ETF for you
These top utility ETFs give investors a good combination of income and growth potential. With subtle difference, you'll be able to pick the fund that best matches your needs and expectations.