Utility sector exchange traded funds (ETFs) are often looked to for an element of predictability, but JP Morgan has misjudged this sector with regard to US electric utilities.
In recent article, Jonathan Bernstein of ETFZone put together a list of the most efficient, best-diversified and lowest-risk utilities ETFs on the market. He explained that investors typically look to this sector to deliver regular cash dividends and lower portfolio beta.
Similar to most sector funds, the number of utilities sector ETFs has exploded in recent years. This sector now offers investors opportunities that include globally diversified ETFs, strategic allocation ETFs, and ETFs providing short exposure or leverage characteristics.
Some of the top utilities ETFs include:
- iShares Dow Jones US Utilities Sector Index Fund (IDU), down 9.7% year-to-date
- Vanguard Utilities ETF (VPU), down 9.5% year-to-date
- First Trust Utilities AlphaDEX Fund (FXU), down 11.1% year-to-date
- Rydex S&P Equal Weight Utilities ETF (RYU), down 10% year-to-date
- SPDR S&P International Utilities Sector ETF (IPU), fund inception on July 16
However, according to a recent Reuters article, JP Morgan has switched to a “neutral” stance on the U.S. electric sector. The article cites concerns such as falling natural gas prices over the past few weeks contributing to the shift.
Another concern leading to the change was the recent campaign of oil billionaire T. Boone Pickens’ calling for $1 trillion worth of investing in wind power to displace natural gas consumption for power in favor of natural gas consumption as transportation fuel.
JP Morgan analyst, Andrew Smith, explained that they expected uncertainty in the US economy coupled with strong fundamentals and earnings momentum of the sector to support certain stocks throughout the year. However, he admits that they were wrong to recommend a positive stance.
Regardless, the utilites sector has lacked its predictability and utilities ETFs have shown this in their negative returns.