Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some regulated utilities companies to your portfolio but don't have the time or expertise to hand-pick a few, the db X-trackers Regulated Utilities ETF (NYSEMKT: UTLT) could save you a lot of trouble. Instead of trying to figure out which regulated utilities 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. This ETF, focused on regulated utilities companies, sports a relatively low expense ratio -- an annual fee -- of 0.45%. The fund is very 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 regulated utilities companies ETF is too young to have a sufficient track record to assess. 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 regulated utilities companies?
The utilities industry is "defensive," as its offerings remain in demand no matter what the economy is doing. Better still, many utility stocks pay substantial dividends. Regulated utilities companies, meanwhile, sometimes operate as monopolies in their regions and have to apply to regulators for rate increases. Nonregulated utility companies tend to face more competition, but are also more free to pursue higher profits via their strategies. Thus they're riskier but might deliver higher returns, too. The companies in this ETF have substantial regulated operations, but may also engage in nonregulated operations, too.
The past year was unkind to many regulated utility companies. FirstEnergy Corporation (NYSE:FE) sank 22.4% and yields 4.2%. It has been retiring coal-powered plants and shedding some hydropower assets, while investing in transmissions and improved grids. The company's fourth quarter featured a 35% dividend cut, along with revenue well below expectations and earnings topping expectations. Its coal operations have been hurting it, along with low prices and regulatory costs.
Consolidated Edison (NYSE:ED) gave up 6.4% and yields 4.6%. Analyst Paul Freemont at Jefferies upgraded the stock in February from underperform to hold and upped his price target by almost 30% to $58, suggesting it's a bit undervalued -- though the stock has recently been trading near $55. It's not likely to be a fast grower, but it does offer steady income, and a recovering economy can help. Its fourth quarter featured revenue roughly flat, but earnings per share up 13%.
Southern Company (NYSE:SO) shed 2.5% and yields 4.6%. It has invested more than $5 billion in "clean coal" facilities and is building nuclear plants, too. In its latest quarter, Southern Company topped expectations for both revenue and earnings. Some worry about Southern's debt load, but others see it as quite manageable, spread over many years, and supported by steady profits. Bulls have had high hopes for its innovative Kemper coal gasification plant, but the project has been delayed by cost overruns and labor issues.
Pacific Gas & Electric Co. (NYSE:PCG) did better than many regulated utilities companies, only dropping 1.4% while yielding 4.1%. It hasn't increased its payout since 2010, though. That's the year of a pipeline explosion in California that killed eight people for which the company is expecting to face criminal charges and major costs. Pacific Gas & Electric returned to profitability in its fourth quarter, though its earnings were below expectations, and it is expected to report its first quarter results on May 1.
The big picture
If you're interested in adding some regulated utilities companies 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.