Eric Dutram: The U.S. economy is showing clear signs of recovery, and while the pace of recovery is very slow, the economic situation here is much better compared to most other developed economies. . As a result, the year has also seen broader U.S. stock market gain, though European woes and slowdown in the emerging economies still continue to impact the market.
In times of uncertainty, investors move their investment from riskier sectors to more defensive plays. Defensive sectors have a low correlation with the broader market which allows them to remain stable in times of economic uncertainty.
In particular, Utility firms have of late been solid performers and could continue to play a leadership role in the coming months. That is because Utility firms remain more or less immune to economic cycles and play a defensive role when the macro economy is under pressure. (Comprehensive Guide to Utility ETF Investing)
The sector includes electric utilities; multi-utilities; independent power producers & energy traders; and gas utilities which are considered indispensable for daily living. Utility ETFs therefore flourished during the downturn because of steady demand.
Also, in this low rate environment when investors shift their focus to high yield investment for a certain level of current income, investment in Utility ETFs is warranted as they not only offer capital appreciation but also pay attractive dividends on a consistent basis to their investors. (Utility ETFs: Slumping Sector In Rebounding Market)
Vanguard Utlities ETF (NYSEARCA:VPU) and Dow Jones U.S. Utilities Sector Index Fund (NYSEARCA:IDU)
Both these #1 Zacks ETF Rank (Strong buy) funds in the Utility space hold their appeal to investors. We expect these funds to outperform their peers.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio in the U.S. Utility market, we have taken a closer look at the top ranked VPU and IDU below:
Vanguard Utilities ETF (VPU)
The Vanguard Utilities Fund is one of the oldest products in the space which provides exposure to the consumer sector at the lowest cost when compared with the category average. The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI US Investable Market Utilities 25/50 Index.
The fund invests its $1.5 billion assets in a basket of 79 stocks. However, with 48.4% of its assets invested in the top ten holdings, the the fund is somewhat concentrated.
Among the sectors,the fund is more tilted towards Electric Utilities and Multi Utilities, as these two hold the lion’s share making up (combined) 86.8% of the total investment. For this exposure, the investor pays an expense ratio of 19 basis points, one of the lowest in the space. Due to a lower correlation with the broader market, the fund delivered a return of 13.5% over a period of one year. (Three Low Beta ETFs For The Uncertain Market)
Dow Jones U.S. Utilities Sector Index Fund (IDU)
The product debuted in the middle of 2000 and tracks the Dow Jones U.S. Utilities Index. The ETF employs a representative sampling technique of stock selection based on certain fundamental and market capitalization characteristics. Unfortunately, investors have to pay a higher amount in fees and expenses for this fund as it charges 0.47% for expenses annually. (11 Great Dividend ETFs)
IDU pays out a yield of 3.34% per annum and currently holds 67 securities in its portfolio. It has total assets of about $666.4 million with a 48.12% allocation towards the top 10 holdings.
The high expense ratio of the ETF compared to other ETFs in the utility space has, however, been justified. This is because IDU has performed relatively better than most of its counterparts, returning 13.38% on a yearly basis.
In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.