Eric Dutram: There is no question any more, markets are on a shaky footing. Seemingly every sector is facing some degree of weakness, while concerns are building about global growth and the impact of a strong dollar as well.
In fact, over just the last five days, the S&P 500 has lost close to 0.7% while SPDR sector ETFs targeting energy and materials have both slid by more than 3.5% in the time period. There was a single segment that was able to outperform and gain more than 1% in the time frame though; utilities.
Utilities in Focus
Though utilities are certainly not a ‘sexy’ industry, they can be interesting choices in rocky markets. That is because they are very low-beta, and are relatively immune from market ups and downs. Plus, they are less impacted than most by a strong dollar environment (due to a lack of exports or global exposure), and if anything, benefit from a strong currency and its impact on commodity prices.
Investors should also note that utilities are a relatively interest rate sensitive sector and usually give out strong yields. Yet with falling treasury bond yields, utilities only look more attractive in the near term, and are actually helped by the broad flight to safety. And should this broad market trend continue, utilities could put up strong relative performances and help to counteract some of the negativity that you are undoubtedly experiencing in other corners of your portfolio.
However, you may never really look at this space and are having trouble deciding which company is the best bet in this safe sector. Fortunately, there are a number of ETFs that follow this segment and can give you broad exposure which will assist in taking out the risk of picking the wrong company in this usually-overlooked segment (see Best Performing Utility ETFs).
Below, we highlight three solid utility ETFs that give investors access to a number of companies in the space, and could be better picks right now if market turmoil remains. Consider any of these if you are looking to reduce the beta in your portfolio, or if you are just looking for a slightly safer place to stash your cash until this downturn is over:
Utilities Select Sector SPDR Fund (NYSEARCA:XLU)
This is easily the most popular utility ETF on the market with over $5.5 billion in AUM. The fund charges investors just 16 basis points a year in fees, while it holds 32 stocks in its basket by tracking the S&P Utilities Select Sector Index.
The fund is skewed towards electric utilities which account for about 56% of the portfolio though multi-utilities receive a solid weighting at about 39% of the portfolio. Top individual holdings include Duke Energy (9.2%), Dominion Resources (7.7%), and NextEra Energy (7.7%).
Investors should also note that the ETF pays out a pretty robust 3.6% dividend, at least when looking at the 30 Day SEC Yield metric. Over the last ten trading sessions, this fund has added about 1.1%, while the S&P 500 has lost 1.25% in comparison.
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