Why Utility ETFs Could Benefit the Stability-Seeking Investor | ETF Trends

With massive layoffs being announced, businesses closing at alarming rates, all-mighty banks failing, consumer spending at lows and an overall ambiguous outlook on the economy, investors are seeking exchange traded funds (ETFs) that track those older and more stable sectors – such as utilities.
There was a time when many investors were trying to hit it big by finding what they thought was the next Google (GOOG). Unfortunately, this high risk method left many more losers then winners. Today this is not the case, most investors are searching for stability and many are turning to utilities. So far in 2009, the Dow Jones Industrial Average (DIA) and the S&P 500 (SPY) are both in negative territory, whereas the utilities industry has actually posted gains.

Moody’s has stated that the fundamentals of the sector are “solid,” based on good credit metrics and a supportive regulatory environment. The ratings agency cautioned that a couple of cautions for the sector are that the U.S. infrastructure is creaky and getting worse, and that environmental legislation could be a challenge. The cost of implementing the laws is a question mark. President Barack Obama wants to spend $11 billion upgrading our electrical grid.

Tom Lydon appeared on Fox Business last week to discuss utility ETFs.

Ron Delegge of ETF Guide states that utilities are attractive because of the tax rules on the income generated by dividends paid by utilities ETFs. In a nut shell, this income is deemed qualified dividend income which is taxed at the beneficial rate of 15% and not ordinary income rates.

So if you want to play the utilities game, there is a vast array of ETFs to choose from. Here are three of them:

  • Utilities Select SPDR (XLU), the largest utility ETF that tracks utility stocks in the S&P 500. It is up 4.9% over the last month and has crossed its 50-day moving average.

  • Vanguard Utilities ETF (VPU), which follows the MSCI U.S. Investable Market Utilities Index and is up 4.3% over the last month and has crossed its 50-day moving average.

  • Rydex S&P Equal Weight Utilities ETF (RYU), which tracks utility stocks in the S&P 500, but weighs them all equally, not based on market capitalization; it is up 7.3% over the last month and has crossed its 50-day moving average.

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.