Utility services play a vital role in a nation’s economic progress as cheap and abundant supply of power keeps the wheels of development rolling. With development comes the need for more power, as cities expand, and the use of new gadgets increases. However, everything comes for a price. Greenhouse gas emitted by large utilities cause immense damage to the environment.
Utilities have been under the scanner for a long time. However, the climate action plan from President Obama earlier this year, followed by the U.S. Environmental Protection Agency’s (EPA) proposal for granting permission for setting up new power plants are putting immense pressure on power producing units.
The utility operators are implementing new technologies in generation and distribution of power. The introduction of smart meters will benefit customers while the smart-grid technology is likely to increase efficiency. However, implementation of these new technologies, over vast service territories, is a long, drawn-out process.
In addition, the cost involved in implementing the latest requirement from the environmental agencies could make power plants run on coal costlier than before. This is compelling power generators to install more eco-friendly power units and develop more power from renewable energy sources. (Read: 3 Homebuilder ETFs Leading the Pack this Earnings Season)
The steady performance of the companies lures investors to the utility space. The biggest positive for the utilities is that there is hardly any viable substitute for utility services. In addition, consistent payment of dividends also makes this sector attractive and the defensive nature of operations insulates the sector from market turbulence.
ETFs to Tap the Sector
The services provided by utilities are always in demand, while positive movement in the economy tends to increase the demand for utility services. Below, we highlight the exchange traded funds (ETFs) in the Utility sector which primarily have a U.S. bias.
Investing in these funds in basket form greatly reduces the risk of investing in particular stocks. Moreover, if one is interested in playing a sector, ETFs have an edge because it comes in a packaged form that gives instant access to a specific sector, the Utility sector in this particular case.
Utilities Select Sector SPDR (XLU)
XLU is one of the most popular and widely traded utility ETFs. The main purpose of this fund is to provide investment results that correspond to the performance of the utilities select sector index. This fund invests nearly 95% of its total assets in the securities comprising the index. The index includes communications services, electrical power providers, and natural gas distributors.
Launched on December 15, 1998, presently XLU has an asset base of $5.5 billion. This fund holds 32 stocks and the top 10 companies hold a 56.98% share of total net assets. The average daily volume is 11,215,310 shares. The fund has a dividend yield of 3.77% and an expense ratio of 0.18%.
Among individual holdings, Duke Energy Corporation, Southern Co. and NextEra Energy Inc. comprising 9.20%, 8.04% and 7.24%, respectively, of total net assets take up the top three spots.
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