Taking Stock Of The Utilities Sector

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 According to a report issued by Deloitte last week, “Utilities are navigating a new era of growth and transformation as they address emerging challenges and rising demand.”  Reading this report led me to focus on the Utilities Sector this week both in terms of ETFs and individual stocks currently rated as attractive by the ValuEngine model. Screening from the ETF Database (etfdb.com) by VettaFi, there are currently 10 non-leveraged US ETFs in the Utilities Sector that focus on traditional utilities rather than infrastructure. Descriptions of all ten ETFs follow:The Utilities Select Sector SPDR Fund () is an exchange-traded fund that is based on the S&P Utilities Select Sector index, a market-cap-weighted index of US utilities stocks drawn exclusively from the S&P 500. The Vanguard Utilities ETF () is an exchange-traded fund that is based on the MSCI US IMI 25/50 Utilities index. The fund is passively managed to invest in the US utilities sector. VPU was launched on Jan 26, 2004 and is issued by Vanguard.The Fidelity MSCI Utilities Index ETF () is an exchange-traded fund that tracks the MSCI US IMI Utilities 25/50 Index, a market-cap-weighted index of stocks in the US utilities sector. FUTY was launched on Oct 21, 2013 and is issued by Fidelity.The iShares U.S. Utilities ETF () is an exchange-traded fund that mostly invests in utilities equity. The fund tracks a broad, market-cap-weighted index of US utilities stocks. IDU was launched on Jun 12, 2000 and is issued by BlackRock.The Invesco S&P 500 Equal Weight Utilities ETF () is an exchange-traded fund that tracks an equal-weighted index of S&P 500 utilities companies. RSPU was launched on Nov 1, 2006 and is issued by Invesco.The First Trust Utilities AlphaDEX Fund () is an exchange-traded fund that is based on the StrataQuant Utilities index. The fund tracks a tiered, equal-weighted index of large- and mid-cap utility firms. Holdings are selected and weighted based on growth and value metrics. FXU was launched on May 8, 2007 and is issued by First Trust.The Virtus Reaves Utilities ETF () is an actively managed ETF that holds US utility stocks. UTES’ managers aim to outperform the sector by selecting and weighting stocks based on fundamental, growth and risk metrics. UTES was launched on Sep 23, 2015 and is issued by Virtus Investment Partners.The Invesco Dorsey Wright Utilities Momentum ETF () is an exchange-traded fund that tracks an index of U.S. utilities firms selected and weighted by price momentum. PUI was launched on Oct 26, 2005 and is issued by Invesco.The Invesco S&P SmallCap Utilities & Communication Services ETF () is an exchange-traded fund that tracks a market-cap-weighted index of small-cap US utilities and telecom services companies, selected from the S&P small-cap 600 Index universe. PSCU was launched on Apr 7, 2010, and is issued by Invesco.The First Trust EIP Carbon Impact ETF () is an exchange-traded fund that mostly invests in stocks based on a particular theme. The fund is an actively-managed fund comprised of developed-economy equities of companies committed to a reduction of carbon emissions. ECLN was launched on Aug 19, 2019, and is issued by First Trust.The following table compares all ten non-leveraged US Utilities ETFs.

The list is sorted by assets under management.  The leader in each columnar category is designated by bolded numbers.  Although daily dollar-weighted trading volume was not included because of space limitations, the order follows closely but with even more dominance by XLU, by far the favorite target for frequent traders of the sector. Another key column is annualized dividend yield.  Many Utilities-focused investors are looking for current income from dividend yields.  There are only slight differences among the top three ETFs in the table, ranging from a low of 2.7% for FUTY to a high of 2.9% for VPU with XLU at 2.8%. All three of these yields are noticeably above the specialty ETFs in the table. Utilities investors also tend to favor low price volatility and Beta.  All ten ETFs in this category are similar and well below the volatility and Beta of the S&P 500 Index.Four of the above ETFs cover the sector as a whole. Three of these are institutionally priced with expense rations between 0.08% (Fidelity’s FUTY) and 0.10% (Vanguard’s VPU) with the oldest still-running Utilities ETF, the Select Sector SPDRs Utilities ETF, XLU, in the middle with 0.09%. The fourth ETF which just attempts to represent the sector is the iShares IDU.  Unlike most iShares, the representative US Sector series does not seem priced to compete for institutional investment dollars. It has an out-of-line expense ratio of 0.39% while attempting no added value. Surprisingly, the top three have posted price gains in that precise order for each of the  four time frames in this analysis.  For Year-To-Date, 1-Year, 3-Year and 5-Year numbers, Utilities Select Sector SPDRs XLU has risen more than VPU which has outgained FUTY. XLU also has by far the lowest P/E ratio of the three, 17.9 as compared with 22.5 and 21.8.  In terms of ValuEngine Rating and One-Year Forecasts, they are all identical with 3 (Hold) ratings and expected 12-month price gains of 1.4%.  Overall, XLU seems to be the best ETF for Utilities sector representation.Although most investors that focus primarily on utilities do so for income, others may attempt to find greater alpha in terms of price-appreciation-per-unit- risk. In that case, expense ratios must go up since more research and/or data are required. This requires focusing on the ETFs in the #5 through #10 slots in the table. No one knows which, if any, of these six will produce alpha in the future, clearly the winner during all of the past by a wide margin has been UTES, the Virtus Reeves Utilities ETF.  Its 50+% year-to-date return is more than 45% higher than the runner up while the 5-year annualized number is 30+% higher.  It is the only actively selective and managed fund in the group of 10.  Although most active managers lose the struggle to outperform passive ETFs in their category, this high conviction fund, currently holding just 17 stocks, has produced significant value-added performance.Another noteworthy outperformer has been RSPU, the Invesco S&P 500 which simply equally weights the S&P 500 Index stocks in the GICS Utilities sector.  Although .   magnitude of outperformance is far less than that of UTES, it also outperformed in each of the four time measured.  I find this especially interesting because in these four periods, the equally weighted S&P 500 ETF, RSP by Invesco, his significantly underperformed SPLG, the lowest-fee market-cap weighted S&P 500 ETF. In other words, although equal-weighting failed miserably at delivering its historical performance in the overall market during the past five years, it worked well for the utilities portfolio.  A much smaller fun, PUI, the Invesco Dorsey Wright Utilities Momentum ETF, performed very well in the past 12-months.  PUI posted the second-best performance in both the year-to-date and 12-monmth periods. It hasn’t come close to justifying its high 60-basis point fee in the 3-year and 5-year periods, however.  The First Trust Utilities AlphaDEX Fund has provided competitive performance with XLU during the four periods, winning two and losing two comparisons.  As befitting its smart-beta tilts, it boasts the lowest P/E ratio of all. Even given all of these positive points, its 64-basis point fee for an algorithmic index ETF seems difficult to justify when 35-basis points is the median for this category. Looking at the underlying stocks through a ValuEngine lens produces five noteworthy stocks.  These stocks include:NextEra Energy, Inc. () – a public utility holding company engaged in the generation, transmission, distribution, and sale of electric energy. Its many properties include Florida Power & Light, Gulf Power and NextEra Energy Resources.  The company, through its subsidiaries, is advocating higher usage of clean fuel sources to generate electricity and aiming to reduce total carbon emissions by 67%.  ValuEngine rates this stock 4 (Buy).Constellation Energy () – generates and markets electricity. Its operating segment consist Mid-Atlantic, Midwest, New York, ERCOT and Other Power Regions. The company sells natural gas, renewable energy and other energy-related products and services. Constellation Energy Corporation is based in Baltimore, MD.  ValuEngine rates this stock 4 (Buy).Oneok, Inc. () – is an energy company engaged in natural gas and natural gas liquids (NGL) businesses. Its operations are divided into 3 reportable business segments: Natural Gas Gathering & Processing, Natural Gas Liquids and Natural Gas Pipelines.  Oneok was founded in 1906 and is headquartered in Tulsa, OK.  ValuEngine rates this stock 4 (Buy).UGI Inc. () – is a domestic and international retail distributor of propane and butane liquefied petroleum gases (LPG); a provider of natural gas and electric service via regulated local distribution utilities; a generator of electricity; a regional marketer of energy commodities; an owner and manager of midstream assets; and a regional provider of heating, ventilation, air conditioning, refrigeration and contracting services. UGI was founded in 1882 in King-of-Prussia, PA. ValuEngine rates this stock 4 (Buy).Lumen Technologies (), being a leading rural local exchange carrier, provides a range of telecom services, including local and long-distance voice, wholesale network access, high-speed Internet access, best-in-class communications & IT solutions, managed hosting and co-location services, and video services to its business and residential customers.  The firm was incorporated in 1968 and is headquartered in Monroe, LA. ValuEngine rates this stock 4 (Buy).The top three stocks range from 60 to 150 Billion in market cap while the latter two have a market cap of $6 billion.  NEE is the largest holding in the top five ETFs and CEG is in most of the top 10 holdings of all the ETFs listed.  LUMN is the largest holding of small-cap PSCU.  All related fundamentals are available in the ValuEngine reports, available for each of these five stocks free upon request. In summary, the performance of the utilities sector has been much better than usual during the past two years.  Despite signs of cooling off lately, the top ETFs are expected to perform at least in line with the market.  Beyond that, ValuEngine still rates a number of these stocks with 4 (Buy) ratings including the five profiled above. More By This Author: