Utility ETF

After attracting a huge following among those seeking stable and robust yields in 2011, utility exchange traded funds fell flat over 2012 and continue to experience redemptions heading into the so-called fiscal cliff.

So far this year, the Utilities Select Sector SPDR Fund (NYSEArca: XLU) has lost $1.8 billion in assets, according to IndexUniverse, and only gained 0.7% year-to-date. Over the past three months, the fund dropped 2.6%. XLU has a 4.06% yield.

As the country heads into the fiscal cliff, investors are already exiting their positions in dividend-paying stocks like utilities in a typically strong period – historically, the Dow Jones Utility Average has generated positive returns in the fourth quarter 36 times since 1969. Given the impending tax hikes, it would make sense to make the move now at the lower rate and reduce future liabilities, writes Roger S. Conrad for Investing Daily.

On the other hand, the exit out of utilities could portend a greater shift toward riskier assets. As investors take on a smaller position in defensive plays, like utilities, people show that they are more comfortable with riskier plays.

“Government regulation, limited competition, and stable demand have traditionally insulated these companies’ profits from shocks to the broader economy,” according to Morningstar analyst Alex Bryan. “Consequently, XLU is a suitable satellite holding for investors looking for defensive exposure to the U.S. equity market and extra dividend income. It could also serve as a tactical bet on low interest rates and long-run growth in the demand for electricity.” [Defensive ETFs to Shield Against the Fiscal Cliff]