Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some utility stocks to your portfolio, the PowerShares Dynamic Utilities ETF (NYSEMKT: 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 0.63%. It recently yielded 2.6%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has performed well, surpassing the world market over the past three and five years. 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.
The fund's turnover rate of 71% reflects that it's based on an index that selects holdings based on price and earnings momentum, among other things (such as management and value), and that it's rebalanced quarterly.
Why utilities?
We can expect the utilities industry to thrive over time, as our planet's growing population and developing economies consume more energy -- and telecommunications services, which are sometimes included in utility indexes such as this one. Utilities tend to be less volatile than much of the market, too, as energy is a rather defensive business. No matter what the economy is doing, we want our electricity -- and we're likely to keep paying our cable bill as long as we can.
More than a handful of utility companies had strong performances over the past year. Oddly named 8x8 (EGHT 5.46%), specializing in high-margin voice-over-IP software, surged 48% as some wonder whether it will be acquired. The stock took a hit last month, when the company's third-quarter earnings report wasn't quite as stellar as hoped, though it does have many strong and growing numbers, such as revenue per customer.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. FirstEnergy (FE -0.24%) shed 2%, challenged by its coal and nuclear operations in an environment of low-price gas. Its gross margins have shrunk in recent years, and its presence in the path of Hurricane Sandy didn't help, either. Still, patient and confident shareholders can collect a 5.4% dividend yield from the company. A possible subsidy for nuclear energy, seen by many as "clean," will help.
Level 3 Communications (LVLT), long burdened with a mountain of debt, shrank by 3% over the past year. It's expanding its services around the world, for example by boosting its video broadcasting in Latin America. Many are avoiding the stock, though, not liking its falling free cash flow or lack of a dividend. It got a nod from the folks at Pivotal last month, who like its increased bookings and project a return to positive free cash flow in 2013. The company's fourth-quarter earnings disappointed some, however, as shares took a sharp hit. Management cited rising costs (including health-care expenses) and effects of Hurricane Sandy as some recent issues.
CenturyLink (LUMN) has been growing steadily, and recently offered a hefty dividend yield of about 9% -- but just a few days ago it announced a 25% dividend cut. The board has authorized a $2 billion share buyback, though, that can benefit shareholders. The company sports some solid free cash flow growth and has been making promising acquisitions, but its share count also has been growing significantly and its earnings are negative.
The big picture
Demand for 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.
