Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some utilities stocks to your portfolio but don't have the time or expertise to hand-pick a few, the First Trust Utilities AlphaDEX ETF (FXU 0.72%) could save you a lot of trouble. Instead of trying to figure out which utilities stocks 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. This ETF, focused on utilities stocks, sports an expense ratio -- an annual fee -- of 0.7%, and it yields about 4%. The fund is fairly small, 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 utilities stocks ETF has underperformed the world market over the past 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.
Why utilities stocks?
While some industries see their fortunes rise and fall along with overall economic conditions -- think automakers or large-appliance makers -- other industries, including utilities, are more "defensive." Their offerings remain in demand no matter what the economy is doing. Better still, many utilities stocks pay substantial dividends.
More than a handful of utilities stocks had solid performances over the past year. Level 3 Communications (LVLT), for example, surged 33% despite the persistence of many concerns including steep debt and negative free cash flow. Still, Level 3 Communications is expanding its services around the world -- for example, it's boosting its video broadcasting in Latin America. The company's net losses have been shrinking, profit margins have been increasing, and revenue has been growing at a double-digit clip. It's poised to benefit from upticks in capital spending by telecom companies.
AGL Resources (GAS) gained 19%, racking up contracts such as an additional one with United Parcel Service to supply liquefied natural gas to the delivery giant's fleet. Situated in some regulation-friendly areas, it has been boosting its natural-gas transmissions business. In its third quarter, AGL Resources trounced earnings estimates, with EPS surging 167%. AGL Resources' stock yields 4%.
Other utilities stocks didn't do quite so well over the last year but could see their fortunes change in years to come. PPL Corporation (PPL 0.48%) advanced 6% and yields a hefty 4.9%. The company has been reining in its coal-fired energy production in light of environmental regulations, replacing much of its lost capacity via natural gas and solar energy. (It's selling a bunch of hydropower assets, though.) PPL Corporation offers investors valuable geographic diversification via its significant operations in the U.K. The recent deep freezes across the U.S. delivered record energy demands from customers, but PPL and its peers have largely been able to keep up. Meanwhile, PPL's move into smart grids has boosted reliability, and the company has topped analysts' earnings estimates for most quarters in the past few years.
Exelon Corporation (EXC 0.56%), the nation's leader in nuclear energy (which some investors see as risky, leading them to steer clear), shed about 5%. It yields a solid 4.4%, but that incorporates a 41% dividend cut last year. Exelon has been hurt by the relatively high cost of nuclear energy in an environment of extremely low gas prices. Its third-quarter numbers were strong, and bulls like its valuation and effective cost-cutting. But its free cash flow and profit margins are well below levels of a few years ago, though there's been a recent uptick. Exelon has not been in the best competitive position in the past few years, but rising natural-gas prices can change that.
The big picture
If you're interested in adding some utilities stocks to your portfolio, consider doing so via an ETF. 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.
