Investors looking for smart beta alternatives to XLU and other cap-weighted utilities ETFs can consider the First Trust Utilities AlphaDEX Fund (NYSEArca: FXU).
Like the other AlphaDEX funds, FXU is “based “on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets,” according to First Trust.
Utilities stocks and ETFs are extremely sensitive to changes in interest rates. Still, some investors see opportunity with rate-sensitive assets such as FXU and real estate ETFs, noting that 10-year yields are overbought and sentiment against the likes of FXU is at bearish extremes, which could create opportunity from the long side with the utilities sector.
Analysts warned that the lofty prices may not be supported by robust earnings growth. Investors can tap the potential potency of earnings growth via FXU’s methodology at an earnings multiple that implies a slight discount to the broader utilities sector.
For more information on defensive ETFs, visit our defensive ETF category.