What is an 'Electric Utilities Industry ETF'

A utilities industry ETF is an exchange-traded fund that invests in companies that generate and distribute electric power. Electric utilities generally account for more than 80 percent of holdings of the largest utilities ETFs. However, since the balance is taken up by utilities that operate in other sectors such as gas, water and pipelines, these ETFs are better characterized as utilities ETFs.

BREAKING DOWN 'Electric Utilities Industry ETF'

Most electric utilities have stable cash flows and high dividend payouts. Such defensive characteristics make utilities ETFs desirable investment candidates during market downturns, as well as during periods of low interest rates, low inflation and economic uncertainty.

The utilities sector contains companies such as electric, gas and water firms, and integrated providers. Because utilities require significant infrastructure, these firms often carry large amounts of debt; with a high debt load, utilities companies become sensitive to changes in the interest rate. In addition to paying hefty dividends, stocks in the utilities sector tend to be reliable and slow but steady growers if held for the long term. Thus, investment managers often include them in a defensive or income-oriented portion of a portfolio. Conservative investors also turn to them in economic downturns when other stocks can become more volatile.  Because utility stocks pay reliable dividends like bonds do, the stocks compete with bonds as consumer investment options. Increasing interest rates make buying bonds more attractive than buying utility sector stocks, further affecting utilities companies’ funding.

Investors in the utilities sector encounter a variety of risks, despite government regulations that offer some stability. Economic growth, changing environmental regulation and increasing interest rates can be negatives for companies and erode or lead to cancelation of dividend yield. In addition, natural disasters and changing commodity prices may affect the bottom line. 

ETF characteristics

An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.

By owning an ETF, investors get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, investors have to pay the same commission to a broker that they'd pay on any regular order.

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