In bear markets, utility stocks and exchange traded funds (ETFs) have appeal for the yields and cushion they can provide. Right now, there are nearly 20 utility focused ETFs. How do you begin to sort through them to find the best one?
Utility ETFs may be an appropriate investment if you’re looking for non-cyclical or defensive investments. Demand for gas, electricity and water utilities tends to be consistent throughout market cycles and therefore leads to consistent dividend yields. There are 19 utility ETFs on the market to choose from. Rebecca Kern for US News & World Report has a way to differentiate the funds that will fit your needs:
- The role within your portfolio matters: A utility fund is used for growth and income through dividends. Since utility funds are sector funds, they should be used to diversify a portfolio but should not be a core holding. [Why utility funds are making a comeback.]
- Why ETFs are preferred: One of the main differences between utilitiy mutual funds and ETFs is that ETFs can be traded throughout the day. Diversified utility ETFs tend to be slightly more stable since they follow an index of primarily regulated utilities, whereas actively managed utilities mutual funds can be slightly more volatile since they sometimes invest in unregulated power companies and telecoms.
- Bull and bear markets: Investors gravitate to safer and more defensive stocks, such as regulated utilities, during down markets, and utilities tend to be just like this. The fact that utility ETFs charge less for their expense ratios than mutual funds make the case for using them stronger. [Can utility ETFs aid your portfolio?]
- Interest rate risk: The rising and falling of interest rates make high-yielding stocks, including many utilities, more or less attractive, and utility ETFs are sensitive to interest rates. Typically, when interest rates are low and cash investments like money market funds aren’t yielding much, investors search for higher-yielding investments, such as utilities stocks, and vice-versa.[Can a utility ETF be a proxy?]
Watch the 200-day moving average; several utility ETFs are below this point. [More on trend following.]
For more stories about utilities, visit our utilities category. Among the many funds you can choose from include:
- Vanguard Utilities (NYSEArca: VPU)
- iShares Dow Jones U.S. Utilities (NYSEArca: IDU)
- iShares S&P Global Utilities (NYSEArca: JXI)
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.