Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the utility industry to thrive over time as our growing population keeps requiring more and more power, the Utilities Select 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.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The utilities ETF's expense ratio -- its annual fee -- is a very low 0.18%. It recently yielded around 3.7% in dividends as well.
This ETF has performed rather well, topping the world market over the past three, five, and 10 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.
With a low turnover rate of 3%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
More than a few utility companies had strong performances over the past year. Electric specialist Entergy (NYSE: ETR), up 16%, sports a dividend yield of 4.8%. In its second quarter, it posted disappointing revenue (down 10%) but topped analyst estimates for earnings, which rose 16%. It's in the process of trying to join the Midwest Independent Transmission System Operator (MISO) transmission group, which should save its customers money. But regulators in Arkansas, a state in which Entergy operates, have thrown a wrench into the works by balking at the proposal.
PPL (NYSE: PPL), yielding 4.9%, is up 11% over the past year. It appears attractively priced, with its P/E ratio of 10 well below its five-year average of 16.5. Revenue and earnings have been growing at accelerating rates, and its U.K. operations are doing particularly well. It earned higher marks in many investors' eyes after posting estimate-trouncing earnings recently.
Other companies didn't do as well last year but could see their fortunes change in the coming years. Exelon (NYSE: EXC), down 8%, is the nation's top nuclear-power utility, though it also has plenty of non-nuclear doings. Recently yielding 5.7%, it has had slow and lumpy revenue growth lately, with net losses instead of gains. The low price of natural gas has been making other power sources less attractive in comparison. The nuclear connection doesn't help, either, given Japan's recent disaster, but nuclear power isn't likely to disappear any time soon.
Public Service Enterprise Group (NYSE: PEG), meanwhile, yielding 4.4%, shed 2% over the past year. It recently posted some declining earnings largely because of this past year's mild winter. Still, it has been building capacity and improving efficiency at its plants and is looking to expand in solar energy as well. Bears worry about pension costs and the rising cost of coal, while bulls like the company's investments in boosting its operational reliability as well as its solid portfolio of assets.
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.
Utility stocks have long offered sizable dividends. But that's not the only route to income. For more hefty dividends, check out our special free report, "Secure Your Future With 11 Rock-Solid Dividend Stocks." It features some companies you know, and some others you probably don't.
