The market environment of 2016 has, so far, proven to be quite volatile. Investors are growing increasingly worried about the global economy and the effectiveness of the central banks’ accommodative monetary policies. Given the recent global economic uncertainty, it’s not very surprising that defensive sectors such as utilities and consumer staples have been doing so well. These sectors are considered defensive because they offer investors low beta stocks with steady high-dividend returns in industries with predictable cash flows. Unlike other sectors, where aggregate demand can shift wildly depending on consumer confidence, utility companies provide an essential service that most humans prefer not to go without.

In addition, the utilities sector has been aided by an increase in U.S. housing starts, which hit its highest level in five months during February. The 5.2% increase in groundbreaking means that there will be more than one million new houses that the utility companies will have to service. These factors have contributed to the utilities sector outperforming the market by more than 10%. Year to date (YTD), the S&P 500 Utilities Sector has gained 12.2%, while the S&P 500 as a whole has only risen by 1.7%.

The best way for the average investor to gain exposure to the utilities sector without incurring idiosyncratic risk is through exchange-traded funds (ETFs). However, all ETFs are not created equal. Like all investments, investors must consider the fee structure and liquidity, along with other factors of individual ETFs when considering whether to invest.

Best-Performing Utilities ETFs for 2016

The Proshares Ultra Utilities ETF (NYSEARCA: UPW) is a 2x leveraged ETF that seeks to track the return of the Dow Jones U.S. Utilities Index. It offers a 1.92% dividend yield and a net expense ratio of 0.95%, which are pretty unattractive compared to other utility ETFs. In addition, UPW also has a very low average daily trading volume of 3,190, which presents a rather large liquidity risk for investors. However, due to the leveraged nature of this product, UPW has outperformed all other utilities ETFs so far this year, rising 27.2% YTD.

For investors looking for less volatility and more liquidity, the First Trust Utilities AlphaDEX Fund (NYSEARCA: FXU) and the Utilities Select Sector SPDR Fund (NYSEARCA: XLU) offer the best options. Together, they have both appreciated this year by more than 14%, with FXU slightly outperforming XLU by less than 0.5%.

FXU’s outperformance may be due to the proprietary investment strategy of the StrataQuant Utilities Index, which FXU tracks. The StrataQuant Utilities Index uses multiple growth and value factors, such as sales-to-price, one-year sales growth, book value to price and return on assets to rank utilities stocks from the Russell 1000 Index. The bottom 25% ranked stocks are eliminated, and the top 75% ranked stocks are added to the StrataQuant Utilities Index, with the highest-ranked stocks receiving a higher rank within the index. Because of this complex investment strategy, FXU has a 0.66% expense ratio, slightly higher than the average.

If expenses are your main concern, then look no further than XLU. With a dirt-cheap expense ratio of 0.14%, XLU seeks to provide a return that closely correlates to that of the performance of the S&P 500 utilities index. However, XLU has a slightly lower dividend yield of 3.43%, compared to FXU’s yield of 3.66%. Either way, investors seeking to gain exposure to the utilities sector will be well off in either one of these ETFs.

Worst-Performing Utilities ETFs for 2016

While U.S. utility companies have been outperforming the U.S. market, their constituents overseas have not been having the same success. With a steadily improving domestic economy and a strong dollar, the U.S. financial markets have seen a rise in net investment from foreigners. Unsurprisingly, due to economic factors and monetary policies, such as negative interest rates, many foreign investors prefer the U.S. market over their own. This is why ETFs that invest solely in international markets, such as the SPDR S&P International Utilities Sector ETF (NYSEARCA: IPU) and WisdomTree Global ex-US Utilities Fund (NYSEARCA: DBU), have had such a dismal performance this year.

IPU’s top three country allocations are the United Kingdom, Japan and Spain, while DBU mainly invests in the United Kingdom, Canada and Italy. They have reasonable expense ratios of 0.4% and 0.58% and dividend yields of 3.64% and 3.66%, respectively. Although they both have had lackluster returns this year of below 2%, they do offer investors great exposure to international utility companies. On the other hand, both IPU and DBU have very low average trading volumes, and investors should make note of the liquidity risk of these instruments if they choose to invest.

The Bottom Line

The utilities sector should continue to be a good investment if this market volatility continues. Utilities ETFs offer investors a great alternative to investing in single utility companies alone, but they too, have risks. Expenses and liquidity are two very important factors that should always be considered when investing, and many of the utilities ETFs listed above have low trading volumes.

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