The Appeal of Utility ETFs – Especially Now

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In this day and age of market volatility, paltry yields and a general feeling of instability, you might begin to see the appeal of utility-focused exchange traded funds (ETFs).

Utility ETFs hold portfolios of regulated utility companies with guaranteed profit margins, and they can also regularly pay out decent dividends. Jonathon Bernstein for ETF Zone reports that utility ETFs are defensive and, historically, their dividends are stable. [How Utility ETFs Can Help a Portfolio.]

Utility funds are defensive in that although they tend to move with the equity markets, they move up less then benchmark equities when the market goes up and down less when the market goes down. And remember, these shares are responding to the demand for water, electricity and gas, essentials for modern-day living and things few can go without for long. [Time to Look at Utility ETFs?]

Right now, utility ETF dividends yield about 2% more than benchmark U.S. Treasury bonds. Major risks to utility investing are sensitivity to regulatory changes, interest rate risk and systematic market risk. Since utility shares compete with U.S. Treasury bonds for yield, utilities ETFs also tend to be sensitive to interest rate changes. In this market climate, this is less of a concern.

For more stories about utilities, visit our utilities category.

• Utilities Select Sector SPDR (NYSEArca:XLU)

• Vanguard Utilities ETF (NYSEArca:VPU)

• iShares Dow Jones U.S. Utilities Sector Index Fund (NYSEArca:IDU)

Tisha Guerrero contributed to this article.