Utility services play a vital role in a nation’s economic progress as cheap and abundant supply of power keeps the wheels of development rolling. With development comes the need for more power, as cities expand, and the use of new gadgets increases.
Per U.S. Energy Information Administration (EIA), total energy use in the U.S. will increase to 106.3 quadrillion Btu in 2040 from 95 quadrillion Btu in 2012. Most of this demand is expected to come from the Industrial sector followed by the Commercial sector.
Even so, the utilities have been under review for a long time. The climate action plan of the U.S. President followed by the U.S. Environmental Protection Agency’s (EPA) proposal for tightening the rules to set up new power plants are putting immense pressure on power producing units.
To meet the stringent regulation, utilities are now gradually shifting their emphasis towards natural gas and alternate energy sources to produce power. The utility operators are also implementing new technologies in generation and distribution of power. The introduction of smart meters will benefit customers while the smart-grid technology is likely to increase efficiency. (Read: 3 MLP ETFs riding out market volatility)
Utilities are by their very nature monopolistic businesses. As a result, the sector is highly regulated as the essential supplies cater to basic human needs, and governments try to ensure the prices of these supplies – water, electricity, etc. – stay within reasonable limits.
The utilities, on the other hand, try to increase prices through the filing of rate cases. The investments and costs incurred for the modernization and maintenance of reliable services are recovered through these rate cases.
Mainly, the steady performance of the companies lures investors to the utility space. The biggest positive for the utilities is that there is hardly any viable substitute for utility services.
ETFs to Tap the Sector
The services provided by utilities are always in demand, while positive movement in the economy tends to increase the demand for utility services. In addition, consistent payment of dividends also makes these ETFs attractive and the defensive nature of operations insulates these ETFs from market turbulence.
Below, we highlight the ETFs in the Utility sector which primarily have a U.S. bias.
Utilities Select Sector SPDR (NYSEARCA:XLU)
XLU is one of the most popular and widely traded utility ETFs. The main purpose of this fund is to provide investment results that correspond to the performance of the utilities select sector index. The index includes communications services, electrical power providers, and natural gas distributors.
Launched on December 15, 1998, presently XLU has an asset base of $5.4 billion. This fund holds 32 stocks and the top 10 companies hold a 57.77% share of total net assets. The average daily volume (3 months) is 10,068,856 shares. The fund has a dividend yield of 3.65% and an expense ratio of 0.18%.
Among individual holdings, Duke Energy Corporation, NextEra Energy Inc. and Dominion Resources comprising 9.27%, 7.98% and 7.95%, respectively, of total net assets take up the top three spots.
Vanguard Utilities ETF (NYSEARCA:VPU)
This ETF aims to match the performance of the MSCI US Investable Market Utilities Index. The ETF was launched on January 15, 2004. Presently this fund manages an asset base of $1.5 billion.
This fund holds 78 stocks and the top 10 companies hold 46.51% of total net assets. The average daily volume (3 months) is 110,519 shares. The product has a dividend yield of 3.57% and an expense ratio of 0.14%
The top three individual holdings in the ETF include Duke Energy Corporation, Dominion Resources and NextEra Energy Inc. with asset allocation of 8.13%, 6.25% and 6.07%, respectively.