Defensive stocks such as utilities have long been a staple in asset allocation among conservative and moderate investors. The services provided by utility companies are constantly in demand regardless of broad economic trends, which offers investors a degree of stability in terms of stock price even in down markets. Although utility stocks do not present the same growth opportunities as other equity holdings, the stability in revenue lends itself to steady dividend payouts to shareholders. For investors seeking equity exposure without the volatility inherent to equity markets, utility company stocks provide a smart solution.
Utility stocks can be purchased as single company holdings or within sector-focused mutual funds. Utilities mutual funds offer a greater level of diversification across various geographical regions as well as market capitalization categories that cannot be achieved when purchasing individual stock positions. Prior to investing in a utilities mutual fund, it is important for investors to carefully review the fund's prospectus to garner information regarding the risk of underlying investments.
Franklin Utilities Fund
The Franklin Utilities Fund has an inception date of 1948, making it one of the oldest utilities sector-focused mutual funds available to investors. Fund managers seek capital appreciation in addition to current income by investing a minimum of 80% of fund assets in securities of public utilities companies. Enterprises that provide electricity, natural gas, water or communication services to the public, or companies that provide support services to public utility companies may qualify to be held within the fund. It primarily invests in common stocks, but it may diversify to other types of securities as the fund managers see fit.
The majority of the fund's assets are invested in domestic utilities companies, but fund managers diversify in terms of market capitalization. Large-cap companies make up the largest portion of the investment mix at 58.77%, followed by mid-cap companies at 26.81% and small-cap companies at 10.44%. Top holdings include Dominion Resources at 5.58%, NextEra Energy at 5.34%, Edison International at 5.24%, Duke Energy at 4.83% and Sempra Energy at 4.39%. As of December 2015, the mutual fund has generated a 10-year annualized return of 7.51% with an expense ratio of 0.75%. Investors are charged an upfront sales load of 4.25% when they purchase shares.
Fidelity Select Utilities Portfolio
The Fidelity Select Utilities Portfolio was established in 1981 and seeks to provide investors with capital appreciation over the long term. The majority of fund assets are invested in securities of companies primarily engaged in the utilities industry or entities that derive most of their revenue from utility operations. Fund managers have flexibility in selecting holdings from domestic or foreign issuers, although each underlying investment must undergo fundamental analysis to determine financial condition, industry position and market conditions that may affect its performance.
Despite its ability to invest overseas, the entirety of the Fidelity Select Utilities Portfolio's assets are held in domestic securities. Large-cap companies make up the largest portion of the investment mix at 63.99%, followed by mid-cap companies at 28.32%. Top holdings within the mutual fund include NextEra Energy at 16.52%, Exelon at 11.37%, Sempra Energy at 11.04%, Dominion Resources at 9.47% and PPL at 5.06%. The fund has generated a 10-year annualized return of 6.78% as of December 2015 with an expense ratio of 0.8%. Investors are not charged an upfront or deferred sales load.
Prudential Jennison Utility
The Prudential Jennison Utility fund has an inception date of 1990 and seeks to provide total return through a combination of current income and capital appreciation. Fund managers invest at least 80% of assets in equity and equity-related securities of utility companies, with the ability to invest up to 50% of assets in foreign issuers. Fund managers may participate in the initial public offering (IPO) market as they see fit. Each holding is analyzed based on a value-investment style.
The majority of the fund's assets are invested in developed markets, but fund managers offer exposure to North American securities at 90.71% and the greater European market at 8.15%. While 67.28% of fund assets are held in utilities companies, 16.47% of the fund is invested in communication services companies, 11.94% in energy companies and 2.11% in industrial companies. Mid-cap companies make up 42.64% of the allocation, followed closely by large-cap companies at 40.89%. Top holdings include NextEra Energy at 4.13%, Sempra Energy at 4.02%, PG&E at 3.89%, SBA Communications at 3.54% and DTE Energy at 3.51%. As of December 2015, the Prudential Jennison Utility fund has generated a 10-year annualized return of 6.48% with a net expense ratio of 0.82%. Investors are assessed an upfront sales load of 5.5% when they purchase shares.
Rydex Utilities Fund
The Rydex Utilities Fund was established in 2004, and it seeks to provide capital appreciation. The fund invests a substantial amount of its assets in equity securities of utility companies headquartered in the United States. Fund managers may include derivatives such as futures contracts, options on securities, stock indexes and American depository receipts (ADRs) in the investment mix. While flexibility exists in terms of the market capitalization of holdings, fund managers focus on securities of organizations with small- to mid-cap revenues.
The Rydex Utilities Fund provides minimal exposure to foreign markets through ADR holdings, but it diversifies domestic holdings by investing 42.61% in mid-cap companies, 33.98% in large-cap companies and 20.85% in small-cap companies. Top holdings within the fund include Duke Energy at 3.50%, NextEra Energy at 3.46%, Dominion Resources at 3.26%, Southern Company at 3.23% and Sempra Energy at 2.62%. As of December 2015, the mutual fund has generated a 10-year annualized return of 5.12% with an expense ratio of 1.6%. An upfront sales load of 4.75% is charged to investors when they purchase shares.
ICON Utilities Fund
The ICON Utilities Fund was established in 2010 and seeks to provide investors with long-term capital appreciation. Fund managers invest no less than 80% of fund assets in equity securities of companies engaged in the utilities sector. The fund may hold common stock or preferred stock of companies that fall within any market capitalization category and in any geographical region.
The ICON Utilities Fund invests the majority of fund assets in the utilities sector, but it also offers exposure to the communication services industry at 7.43% and the energy sector at 7.8%. All holdings within the mutual fund are domestic equities, with 42.04% invested in mid-cap companies, 27.79% in large-cap companies and 19.95% in small-cap companies. Top holdings include Duke Energy at 7.23%, Public Service Enterprise Group at 5.72%, UIL at 5.60%, CMS Energy at 5.37% and Ameren at 5.35%. As of December 2015, the mutual fund has generated a five-year annualized return of 9.24% with an expense ratio of 1.75%. Investors are charged an upfront sales load of 5.75% when they purchase shares.