Making Money Alert
ETF Talk: Steady-Performing Utilities Shine Again
09/21/2011
One of the best-performing exchange-traded funds (ETFs) this year is the Utilities Select Sector SPDR (XLU), up 10.4% year to date. Why is this fund excelling? Well, the fund primarily invests in companies that keep the lights on for us. During times of market uncertainty, recessions and general panic, the traditional defensive play of electric companies is a shining star.
While most companies and industries tend to rise and fall with the ebb and flow of the market, utilities are one of the most stable sectors of them all. Let’s face it; we always want electricity in our homes and offices. If the power goes out, we have a crisis in the making.
The Utilities Select Sector SPDR seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in the Utilities Select Sector Index. That Index encompasses companies that produce, generate, transmit or distribute electricity or natural gas. The component companies include Exelon Corp., Southern Co., and Dominion Resources Inc.
In addition, XLU has a very low beta of 0.56. Beta is a measure of volatility. A beta of less than 1 indicates that a fund is less volatile than the overall market. So, when you own XLU, be prepared to see a more consistent share price than you usually might expect. For that reason, it also is a good investment if you do not like to track your portfolio every hour of the day.
As of Sept. 20, the ETF’s top ten holdings were Southern Co. 8.81%, Exelon Corp. 7.01%, Dominion Res Inc VA 6.91%, Duke Energy Corp 5.82%, Nextera Energy Inc 5.64%, FirstEnergy Corp. 4.62%, American Electric Power Inc. 4.46%, Public Svc Enterprise Group 4.23%, PG&E Corp. 4.17% and Consolidated Edison Inc. 4.11%.
A great aspect of buying XLU is a dividend yield of 4% that allows you to not only hold a solid investment class in utilities, but also receive a pay out that guarantees some income in your portfolio. Many of these utilities that have been performing well and paying enticing dividends at the same time that the market has been lagging.
Remember, utilities are not an unknown sector. Since the beginning of the latest downturn, investors have piled into the utilities sector for protection and many in the media have considered this sector to be overbought. It currently is trading at its 52-week high. But if there is a pullback, it is still a good play looking forward. Considering the low-interest rate environment, and the wild swings in the market, XLU can provide income and stability. These are pluses that neither U.S. Treasuries with their low rates, nor most stocks, can offer.
As always, if you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my ETF Trader service. I am happy to answer your questions, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.