In Bull Markets, Utility ETFs Still Have Benefits
February 19th at 1:00pm by Tom Lydon
Although the stock market has come back strong, you’ve still got good reason to think about utility exchange traded funds (ETFs) and the benefits they can offer any portfolio.
The electric utilities sector holds many dividend plays that will help cushion a growth portfolio from its occasional dips, writes YCharts for iStockAnalyst. As the the market makes gains, investors pull money out of utilities for riskier plays, which has left many utilities undervalued.
- Utilities are safe, no-surprise plays. These companies used to operate as government-endorsed monopolies that control the whole chain of production through distribution. Now, deregulated electric utilities are competing for customers, and many operate in non-regulated businesses, like trading energy futures or building power plants on speculation. As a result, utilities may cut their dividends since earnings didn’t meet expectations. [M&A Activity May Charge Up Utility ETFs.]
- For the investors who are still looking to utilities, a company’s willingness and ability to consistently payout dividends are among the top draws.
- Utility ETFs are experiencing an influx in interest from boomers as they make the transition to fixed-income investments for their retirements, according to the Wall St. Cheat Sheet. Rising energy consumption and a stronger economy also adds strength to the utilities sector.
The Wall St. Cheat Sheet provides a couple of utility ETFs to keep an eye on:
- Utilities Select Sector SPDR Fund (NYSEArca: XLU). XLU is highly liquid and a good way to diversify into U.S. utilities. It also boasts a 4.7% dividend.
- iShares S&P Global Utilities Sector Index Fund (NYSEArca: JXI). JXI is a global utilities play. Though not as liquid, the fund could better be served as a long-term play. It has a respectable 2.95% dividend.
- First Trust NASDAQ Smart Grid Infrastructure (NASDAQ: GRID). GRID provides exposure to the clean-energy utilities plays. It should be noted that the fund does trade at a rather low volume.
If you want to play bullish or bearish sentiment toward the sector, two options for that are:
- ProShares Ultra Utilities Fund (NYSEArca: UPW). UPW is a leveraged 2x daily bull, maximizing the daily moves of the underlying index.
- ProShares UltraShort Utilities Fund (NYSEArca: SDP). SDP is a leveraged 2x daily bear, a good way to play the sector if it falters short- or long-term.
For more information on the utilities sector, visit our utilities category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.