The utilities sector accounts for a very small percentage of the S&P 500 (.SPX). Typically, that would lead investors to think the utilities sector is overlooked, but among the broad market’s smaller sectors, utility stocks are among the more widely followed. There are several reasons why utilities grab attention despite the group’s diminutive status in broader benchmarks.
First, the sector usually is not as volatile as more cyclical groups. Second, utility stocks and exchange-traded funds are often prized for above-average dividend yields. Today, the Utilities Select Sector SPDR (XLU), the largest utility ETF, has a dividend yield of 3%, or more than a percentage point above the yield on the S&P 500.
For investors looking to reduce the volatility of their portfolios while bolstering their income streams, here are some of the best utility ETFs to consider right now.
Fidelity MSCI Utilities ETF
Expense Ratio: 0.08%, or $8 annually per $10,000 invested
Fidelity’s cheap ETF footprint is consistently growing and its status as the provider of the least expensive sector ETFs is a big reason why. Yes, that means the Fidelity MSCI Utilities ETF (FUTY) is currently the cheapest out of all the utility ETFs on the market. Fidelity clients can realize added cost benefits with this utility ETF because Fidelity ETFs are available commission-free.
The $733 million FUTY follows the MSCI USA IMI Utilities Index. FUTY is comparable to XLU, but these utility ETFs are not identical twins. That much is proven by FUTY’s slight edges in annualized volatility and returns over the past three years.
While FUTY has some differences with the rival XLU, the dividend yield on the two utility ETFs is comparable as are earnings metrics.
Reaves Utilities ETF
Expense Ratio: 0.49%
Prior to April 1, the Reaves Utilities ETF (UTES) sported the sort of high fee common for an actively managed utilities ETF. UTES’ current expense ratio of 49 basis points only bolsters the fund’s reputation as one of the best utility stock ETFs available.
The aim of UTES is to outperform the S&P 500 Utilities Index. UTES’ qualitative (management interviews, field research, macro factor analysis) and quantitative (modeling, valuation, technicals) analysis inform bottom-up security selection through a dynamic investment process emphasizing disciplined risk management,” according to the issuer.
Active management does have some benefits within the utility sector. For example, the UTES management team can drill down on the sector’s better risk/reward opportunities while potentially identifying some utility stocks that are less sensitive to rising interest rates than the sector at large. In 2019, this utilities ETF is beating XLU by 1.5 percentage points.
Invesco S&P 500 Equal Weight Utilities ETF
Expense Ratio: 0.40%
Many of the largest utility ETFs are cap-weighted funds, meaning they tilt toward the sector’s largest constituents. That strategy makes sense because the sector is a large cap-intensive group, but reducing dependency on the sector’s biggest names can payoff from time-to-time.
The Invesco S&P 500 Equal Weight Utilities ETF (RYU), the dominant name among equal-weight utility ETFs, is home to 28 stocks. None of its components command weights of more than 4.3%. In traditional utility ETFs, the largest holding’s weight is usually double or triple what it is in RYU.
This utility ETF allocates about 35% of its weight to mid-cap stocks, a figure that is high relative to rival funds.
Invesco DWA Utilities Momentum ETF
Expense Ratio: 0.60%
When an investor really wants a unique weighting methodology for utility stocks, the Invesco DWA Utilities Momentum ETF (PUI) is the best utility ETF to consider.
PUI tracks the Dorsey Wright Utilities Technical Leaders Index, which “is designed to identify companies that are showing relative strength (momentum), and is composed of at least 30 securities from the NASDAQ US Benchmark Index. Relative strength is the measurement of a security’s performance in a given universe over time as compared to the performance of all other securities in that universe,” according to Invesco.
While momentum is not often a trait associated with utilities ETFs, the point is PUI works when this sector is in favor.
Invesco S&P SmallCap Utilities & Communication Services ETF
Expense Ratio: 0.29%
Speaking of smaller utility stocks, the Invesco S&P SmallCap Utilities & Communication Services ETF (PSCU) is the small-cap answer to the aforementioned XLU. All of POSCU’s holdings are small-cap stocks, according to Invesco.
Yes, small-cap utility ETFs can outperform their large-cap peers, but do not expect a utility ETF like PSCU to consistently outperform standard small-cap benchmarks.
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