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 growing population continues to demand energy, the PowerShares Dynamic Utilities ETF (NYSE: PUI ) 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.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The PowerShares ETF's expense ratio -- its annual fee -- is a relatively low 0.60%. It's relatively small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF hasn't turned in the best performance yet in its young life. It has underperformed the S&P 500 over the past three years, and roughly matched it over the past five. 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.
What's in it?
Several of the utilities that this ETF tracks made strong contributions to its performance over the past year. Duke Energy (NYSE: DUK ) , up 25%, is poised to become America's biggest electrical utility via its planned merger with fellow ETF holding Progress Energy. Duke is forecasting higher prices due to companies in the industry needing to spend significantly on updating their infrastructure. Over 100 years old, electric utility Southern (NYSE: SO ) gained 23%. Recently reporting slow but steady growth, its management also noted that economic conditions were improving, boding well for Southern's future. In the meantime, patient investors are enjoying its fat dividend.
But the ETF goes beyond traditional utilities. American Tower (NYSE: AMT ) , now a real-estate investment trust (REIT), gained 20%, and boasts strong revenue growth and operating margins. As demand for mobile broadband grows, American Tower's towers are likely to remain in demand.
Other companies didn't do as well last year, but could have better returns in the years to come. Cisco Systems (Nasdaq: CSCO ) shrank by 8%, for example. The past year was a transformational one for the company, as it shed some businesses (such as its Flip cameras) in order to focus more on its core businesses. Many are taking a wait-and-see approach to the company, though.
The big picture
Demand for energy and utilities 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.
Learn about "5 ETFs That Could Soar in 2012." And if you're looking for some great investments beyond ETFs, consider these "12 Dividend Stocks for 2012."
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