Last year, the electric utilities sub-sector took the industry up 15.4% , compared to the S&P 500, which was flat. Despite the investor pullback in the utility sector over the first months of 2012, the case for investing in a focused exchange traded fund is still solid.
“Last year’s outperformance of the electric utilities sub-industry, which accounts for 3.4% of the S&P 500, was driven, we believe, by an investor shift into electric utilities due to the extraordinary volatility and often sharp declines in the broader market, as well as their above average dividend yields. This year, the reverse seems to be true, with investors moving out of the electric utilities group so as to take advantage of the turnaround in the broader market,” Justin McCan, S&P Capital IQ Equity Analyst, said in a recent report. [Investors Rotate Away from Utilities ETFs]
Those investors looking for utility exposure through an ETF could consider Utilities Select Sector SPDR (NYSEArca: XLU) or Vanguard Utilities Fund (NYSEArca: VPU). Both ETFs have large holdings in utility companies that have dividend yields ranging from 3.2% to 5.3%. Companies found in the top holdings of these ETFs are in good positions to benefit from an improvement in the economy as well as the power markets. [Utilities ETFs Fall As investors Embrace Riskier Assets]
XLU has a dividend yield of 3.9%, and touts $6.37 billion in assets. VPU has a dividend yield of 3.6% and has $1.044 billion in assets. McCan reports that both ETFs are in the top quarter of their asset class due to low volatility, and low expense ratios. [Lower Risk Stock ETFs To Consider]
After the strong run-up in 2011, the utility sector has dropped off over the first weeks in the new year. The run-up in the broad market has shifted investor interest. However, with the news of recent utility company mergers and the possible rebound in the economy, a utility investment is still a good way for investors to diversify their assets.
Utilities Select Sector SPDR
Tisha Guerrero 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.