Utilities exchange-traded funds (ETFs) offer investors the opportunity to add positions to their portfolios that can provide growth, income and market-beating returns in many cases. Here is a synopsis of the five most popular utilities ETFs as measured by assets under management (AUM), as of March 4, 2016.
Utilities Select Sector SPDR ETF
As a fund that tracks only the utility companies in the Standard & Poor's 500 index, the Utilities Select Sector SPDR ETF (NYSEARCA: XLU) offers exposure limited to the largest 29 utilities in the United States. The fund is the largest of the utilities ETFs with AUM of $7.9 billion, almost four times that of the second-largest fund in the category. Like the three other US. market-weighted funds in the top five, the largest holdings are NextEra Energy, Inc. (NYSE: NEE) and Duke Energy Corporation (NYSE: DUK).
The Utilities Select Sector SPDR ETF is the most liquid fund in the category, trading an average of $845.57 million in dollar volume per day, based on the trailing 45 days. The fund has a distribution yield of 3.37% and an expense ratio of 0.14%. Over the last five years, the fund has delivered growth, income and the best return of the largest utilities ETFs with an annualized return of 12.28%
The Vanguard Utilities ETF
With 79 utilities holdings drawn from the broad utilities market, the Vanguard Utilities ETF (NYSEARCA: VPU) offers investors diversified exposure to the category. As a US. market-weighted fund, the holdings lean toward large-caps, with 48.14% of the portfolio’s $2.13 billion in AUM allocated to 10 positions. The remaining 51.86% of the holdings is invested in market caps ranging from large to small, as well as multiple subcategories, including geothermal and solar companies.
The average dollar volume of $25.27 million per day is a fraction of the Utilities Select Sector SPDR ETF, but it still provides plenty of liquidity for block and individual trades. The fund has a distribution yield of 3.4% and, at 0.1%, has the lowest the expense ratio of the five largest utilities ETFs. Over the last five years, annualized returns of 12.15% have outpaced those of the S&P 500.
The First Trust Utilities AlphaDEX ETF
Using a quantitative strategy that favors mid-cap utilities based on growth and value estimates, the First Trust Utilities AlphaDEX ETF (NYSEARCA: FXU) has grown its AUM to $1.37 billion. The fund draws from the utilities listed on the Russell 1000 but concentrates its portfolio on 40 holdings, the second lowest number in the top five utility ETFs. The First Trust Utilities AlphaDEX ETF is also unique in that it allocates 20% of its portfolio to telecom companies, which are generally not included in indexes used to track utilities.
The fund is an active trader, with an average daily dollar volume of $51.32 million. The distribution yield is 3.54%, and the expense ratio is the highest of the top five at 0.66%, due in part to increased trading within the portfolio based on the fund’s quantitative strategy. The five-year annualized return is 9.06%.
iShares US. Utilities
As one of four US. market-cap-weighted funds in the top five, iShares US. Utilities (NYSEARCA: IDU) offers a similar level of exposure to large-cap utilities, especially within the top 10 holdings. With AUM of $892.85 million, the 10 largest holdings represent 50.28% of the portfolio, while the fund’s remaining 49 positions are distributed across the spectrum of utility companies to deliver broad exposure to the sector.
Average daily dollar volume of $31.31 million provides plenty of liquidity for institutional and individual traders. The fund’s distribution yield is 3.88%. Based in its expense ratio of 0.45%, the fund is the most expensive of the four largest US. market-cap-weighted utility ETFs. The five-year annualized return is 12%, making this ETF the third fund in the group to outperform the S&P 500 over that time frame.
The Fidelity MSCI Utilities Index ETF
With an inception date of Oct. 21, 2013, the Fidelity MSCI Utilities Index ETF (NYSEARCA: FUTY) is the youngest of the five largest utilities ETFs. The fund, with $246.4 in AUM, has a portfolio allocation similar to the three other US. market-cap-weighted ETFs in the group, but its 82 holdings make it most closely aligned with the Vanguard Utilities ETF.
The Fidelity MSCI Utilities Index ETF has the lowest average daily dollar volume of the five largest utilities ETFs at $5.04 million. The relative lack of liquidity could prove challenging for institutions and larger traders who may find the execution of trades to be more efficient with the Vanguard Utilities ETF or the secondary market. The fund has a competitive expense ratio of 0.12% and the highest distribution yield of the group at 4%. The fund is too young to have a five-year track record, but its one-year return of 9.59% handily beat the S&P 500, which lost over 2% during the same period.
The Bottom Line
Utilities offer investors the opportunity to seek both growth and income for their portfolios, especially in a low interest rate environment. Within the group of the five most popular utility ETFs, investors can meet these objectives with a selection of ETFs that includes primarily mid-cap holdings, concentrated portfolios of large-cap companies and/or broad exposure across the utilities sector.