Why utilities are considered a safe haven in a changeable market? Utilities are a diverse group of companies which generate power and water as well as providing natural gas for residential, commercial and industrial building. The utility sector shows a strong parallel to the U.S. bond market in flight to safe assets.
In the past 6 months the median return for diversified utilities is 26.78%, electric utilities 23.59%, foreign utilities 47.40%, gas utilities 28.62%, nuclear utilities -13.43%, and water utilities 26.81%.
Consider the SPDR Utility Select Sector ETF $XLU. The sector holds 99.84% in domestic utilities. The index includes companies from the following industries: electric utilities; multi-utilities; independent power producers & energy traders; and gas utilities. The fund is non-diversified. Its top 10 holdings are $NEE, $DUK, $SO, $D, $AEP, $EXC, $PCG, $PPL, $SRE, $EIX. $XLU performance YTD is 24.08% with a market cap of 2.9 billion. It has a current DIV yield of 3.27%.
The Vanguard Utilities ETF $VPU has 79 holdings. The fund employs an indexing investment approach designed to track the performance of the MSCI US Investable Market Index (IMI)/Utilities 25/50, an index made up of stocks of large, mid-size, and small U.S. companies within the utilities sector, as classified under the Global Industry Classification Standard (GICS). The fund is non-diversified. $VPU holds 100% in domestic utilities. The top 10 holdings are $NEE, $DUK, $SO, $D, $AEP, $EXC, $PCG, $SRE, $EIX. The performance YTD for $VPU is 24.27% with a market cap of 519.05 million and a DIV yield of 3.09%.
One of the biggest attractions of utilities is the dividends. As people chase yields they will look for companies that can increase dividends.
Another defensive play on utilities is their immunity to the rising U.S. dollar. When a company’s assets are in the U.S. and they have all U.S.-paying customers, the strengthening dollar presents less uncertainty in the investment.
Disclaimer, I am long $XLU.
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XLU is a good choice, especially considering possible problems with mutual funds.
I had a bad experience with Fidelity Utilities mut fund FSUTX last year, specifically its manager – one Mr. Simmons, Harvard MBA no less.
Now, I’ve been a long term investor in utilities for a long time and it served me well. The main reason for going mutual fund route vs. ETF is a dividend re-investment, which is free and automatic at Fidelity.
I monitored daily activity via XLU, knowing that mut fund is somewhere close, so noticeable underperformance of FSUTX caught me by surprise. He’s got 70% of the the fund in same 10 utilities as everybody else, with all he has to do is re-balance, re-invest divi and sit tight. I pay this guy 0.8% to do this for me, not to have a turnover rate of 63% (as of 8/31/2015, even higher before that). What the hell is he trading out there?- I wonder. Upon further inspection I was shocked to find out that there is gambling going on in here, including some wild bets on renewable energy, speculation on oil and gas and some strong opinions based on vague assumptions. The most egregious transgression is completely out-of-index trades in Time Warner Cable, because he “consider cable & satellite companies modern-life utilities”…
Say, what? WHAT? Do I have to do everything myself? Really..?
Here is what i did:
http://ibergamot.blogspot.com/2015/12/fmsup.html
Sorry about long comment
Hope it helps