Embrace Low Expense Utilities

By Gregory S. Davis | December 04, 2008 AAA

Whether it's Exelon (NYSE:EXC) in Illinois, Southern Company (NYSE:SO) in Georgia or Dominion Resources (NYSE:D) in Virginia, millions of homeowners and renters send payments each month to their utility providers for their electricity service. This steady flow of income makes the industry attractive for prospective investors.

In this article we'll examine the expenses of three ETFs that all have the three energy companies mentioned above as their top holdings.

Utility ETF Expense Ratio*
Vanguard Utilities ETF
(NYSE:VPU)
0.20%
Utilities Select Sector SPDR
(NYSE:XLU)
0.23%
iShares Dow Jones Utility
(NYSE:IDU)
0.48%
*Source: MorningStar.com



Low Cost Utility Provider
Choosing between the group of utility ETFs can be little easier by remembering to pay attention to the expense ratio. While the difference between the expense ratios for the Vanguard Utilities (VPU) and the Utilities Select Sector SPDR (XLU) is small, the gap between these two and the iShares Dow Jones Utility fund (IDU) is hard to ignore. One potential reason for the difference in the price is the low 7% annual turnover rate of the IDU fund versus 10% for the XLU fund and 23% for the VPU fund. The lower the turnover revenue, the lower the potential tax liability could be from stocks that are sold creating a capital gain. (To learn more, read Scoring Fund Turnover Data.)

Recent Returns
The VPU fund has lost 28.86% in value since the beginning of the year through December 3, while the IDU fund has fallen 30.93%. The XLU fund return is nestled between the two funds falling 29.02% over the same time frame.

Buffett Eyeing Constellation
The present back and forth between Warren Buffett's MidAmerican Energy Holdings and French power generator Electricite de France International (EDF) over Constellation Energy (NYSE:CEG) highlights the relevance of the utility sector in an investor's portfolio. Months after a $4.7 billion offer from Buffett's MidAmerican Energy Holdings, in September EDF has made an offer to acquire 50% of Constellation Energy's nuclear power generation business for $4.5 billion. EDF is a large shareholder of Constellation Energy and has an existing agreement with the company to build nuclear power plants in the U.S. The new offer from EDF is an attempt to prevent the Buffett acquisition.

Final Thoughts
Utility ETFs may be similar in name and in composition, but a closer review of expenses and turnover ratios reveals pertinent differences. The utilities sector represented only 3.56% of the S&P 500 Index at the end September, but the contest for Constellation Energy in December may be a signal of positive years to come for electricity producers. Investors interested should investigate whether their electric provider is represented in the utility ETFs mentioned and consider a dollar-cost averaging approach to begin.

For more about expense ratios, read Stop Paying High Mutual Fund Fees.

comments powered by Disqus
Related Analysis
  1. Unconventional Drilling Still Has Room To Boom
    Stock Analysis

    Unconventional Drilling Still Has Room To Boom

  2. Finding An Alternative With Currency ETFs
    Stock Analysis

    Finding An Alternative With Currency ETFs

  3. Commodities: Has Their Time Come Again?
    Stock Analysis

    Commodities: Has Their Time Come Again?

  4. Why 'Bricks And Mortar' Retail Remains A Solid Bet
    Stock Analysis

    Why 'Bricks And Mortar' Retail Remains A Solid Bet

  5. Is It Finally Time To Get Defensive?
    Stock Analysis

    Is It Finally Time To Get Defensive?

Trading Center