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Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the utility industry to thrive as our world continues demand more and more energy, the Utilities Sector SPDR ETF (NYSE: XLU ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. The utilities ETF's expense ratio -- its annual fee -- is a low 0.20%.
This ETF has performed rather well, beating the S&P 500, on average, over the past three, five, and 10 year periods. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
With a low turnover rate of 11%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
Several of this ETF's components made strong contributions to its performance over the past year. Duke Energy (NYSE: DUK ) , for example, gained about 21% over the past year and is poised to become America's biggest electrical utility via its planned merger with fellow ETF holding Progress Energy (NYSE: PGN ) .
Southern (NYSE: SO ) posted similar gains of 20%, and given the ongoing consolidation in the industry -- which includes merger plans between nuclear giant Exelon (NYSE: EXC ) and Constellation Energy (NYSE: CEG ) -- some expect Southern to find a partner as well. Regardless of that, it remains a dividend powerhouse with a strong payout record.
Other companies didn't add quite as much to the ETF's returns last year but could have an effect in the years to come. Natural gas and electricity concern PPL (NYSE: PPL ) , for instance, gained only 9% over the past year, and its cash-generation power has been fluctuating in recent years, while its return on invested capital has shrunk some.
The big picture
Demand for energy isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.