Sparked by an unstable stock market and low interest rates, the utilities sector has turned in the best performance of all sectors thus far in 2016. Following a dismal performance in 2015, utility stocks have rebounded, with many of them hitting their 52-week high on March 9, 2016. Based on fund flow data, investors have taken notice, pouring billions of dollars into the largest utilities exchange-traded funds (ETFs) since the beginning of the year.
Utility stocks have always been considered a defensive play, thanks to their very low correlation to the broader stock market that keeps them protected from the turbulence of a volatile market. Ever since the steep drop in the market earlier this year, investors have been looking for safe havens. With high levels of safety and their high dividend yields, utility stocks are viewed by many investors as a Treasury bond (T-bond) alternative. In times of uncertainty and angst, utility stocks become a lot more popular, as evidenced by the huge influx of fund flows experienced this year by utility ETFs.
Utilities Select Sector SPDR ETF
The Utilities Select Sector SPDR ETF (NYSEACRA: XLU) is by far the largest utilities ETF with $8.1 billion in assets under management (AUM). This is five times larger than the next-largest utilities ETF. As of March 4, 2016, it has inflows of $1.6 billion. The fund’s objective is to replicate the composition, performance and yield of the Utilities Select Sector Index. It keeps at least 95% of its assets invested in a relatively small number of stocks in large- and medium-cap companies, including electric, gas and multi-utilities, as well an independent producers and energy traders. As of March 9, 2016, the fund has a very attractive trailing 12-month yield of 3.43%. Over the last 10 years, the fund has returned 8.28%, and over the last five years, it has returned 12.14%. Its year-to-date (YTD) return in 2016 is 11.04%. The expense ratio is 0.14%.
First Trust Utilities AlphaDEX ETF
With $1.39 billion in AUM, the First Trust Utilities AlphaDEX ETF (NYSE: FXU) is the second-largest utilities ETF, and it had inflows of $1.2 billion through March 4, 2016. The fund is designed to track the performance and yield of the StrataQuant Utilities Index, which is a modified equal-dollar weighted index constructed by the NYSE to identify utility stocks with the potential to outperform traditional passive-style indexes. This methodology results in a larger allocation toward mid-cap stocks, which comprise more than 50% of the portfolio, and the portfolio also has a small allocation of small-cap stocks. As of March 9, 2016, the fund has a generous trailing 12-month yield of 3.66%. Over the last five years the fund has returned 10.62%. The fund has returned 10.94% YTD in 2016. Its expense ratio is 0.66%.
Vanguard Utilities ETF
The Vanguard Utilities ETF (NYSEACRA: VPU), the third-largest utilities ETF, had inflows of $306 million through March 4, 2016, which boosted its AUM to $2.17 billion. The fund attempts to track the performance and yield of the MSCI US Investable Market Utilities 25/50 Index. Of the 82 securities in its portfolio, more than half are electric utilities, and a third are multi-utilities. The fund is heavily weighted toward large-cap stocks, but it carries a third of its assets in mid-cap stocks and about 10% in small-cap stocks. As of March 9, 2016, the fund’s trailing 12-month yield is 3.41%. Over the last 10 years the fund has returned 8.49% over the last 10 years and 12.05% over the last five years. Its year-to-date return in 2016 is 10.76%. The fund’s expense ratio is a very low 0.10%.
IShares US Utilities ETF
The iShares US Utilities ETF (NYSEACRA: IDU) is the fourth-largest utilities ETF with $915 million in AUM. Its portfolio has been boosted by $242 million in new money through March 4, 2016. The fund attempts to match the performance and yield of the Dow Jones U.S. Utilities Index by investing in a representative portfolio of securities that match the composition of the index. Large-cap stocks make up 60% of the portfolio while mid-cap stocks account for 31%. Less than 10% is invested in small-cap stocks. As of March 9, 2016, the fund has an impressive trailing 12-month yield of 3.95%. Its 10-year return is 8.16%, and its five-year return is 11.91%. YTD in 2016 the fund has gained 10.94%. At 0.43% the fund’s expense ratio is higher than most utilities ETFs.
PowerShares DWA Utilities Momentum ETF
The PowerShares DWA Utilities Momentum ETF (NYSEACRA: PUI) is the eighth-largest utilities ETF, with $194 million in AUM. Through March 4, 2016, the fund reported inflows of $138 million. The fund’s objective is to replicate the investment results of the Dorsey Wright Utilities Technical Leaders Index which is composed of 30 companies in the utilities sector that have momentum characteristics. Its portfolio is more heavily weighted toward mid-cap stocks, and has roughly equal weightings in large- and small-cap stocks. As of March 9, 2016, the fund’s trailing 12-month yield is 2.65%. Over the last 10 years the fund has returned 7.25%, and over the last five years, it has returned 11.35%. YTD in 2016, the fund has returned 9.94%. The fund’s expense ratio of 0.6% is much higher than the average fund in its category.