Skip to main content

Recharging Your Portfolio with Utility ETFs

As the consumer market softens, these ETFs offer broad exposure to the water-and-power sector.
Comments

I'm a stock guy. That means I normally prefer to buy the stock of specific companies -- not bonds, not mutual funds, but individual equities. Every so often, however, I give in and buy or recommend an exchange-traded fund. I usually do that when there is a rising tide effect -- when increases in a sector or market are boosting stock prices overall.

Over the last few quarters, housing would have been a great candidate for this ETF strategy. Real Money Pro subscribers would have done well buying SPDR S&P Homebuilders ETF (XHB) or iShares DJ US Home Construction (ITB). These ETFs are up 36% and 54%, respectively, in the past year or so. Yes, you could have bought shares in individual companies like Toll Brothers (TOL), M/I Homes (MHO), or Pulte Homes (PHM). But you could not argue with the returns for either XHB or ITB -- both of which easily trounced the S&P 500 over the last 12 months.

Not bad. And for casual investors, buying either of those baskets removed several layers of work. Of course, it helped that the trend powering those ETFs was friendly to investors. 

I kept that mind as I read through yesterday's March industrial production report. While the sequential comparisons dipped, one thing caught my eye: the strong growth in utilities. March readings for utilities -- both month-over-month and year-over-year comparisons - were up big. This was no surprise given the longer-than-usual winter weather, particularly in the Midwest and eastern U.S.

The question, of course, is whether or not the strong demand for electricity and the like will continue. According to the latest forecasts from the National Oceanic and Atmospheric Administration (NOAA):

  • Nearly 51% of the contiguous U.S. was in drought conditions as of April 9. These conditions are expected to persist, with new drought developments in California, the Southwest, the southern Rockies, Texas and Florida.
  • Odds favor above-average temperatures across much of the continental United States, including drought-stricken areas of Texas, the Southwest and the Great Plains.

And, if these forecasts are accurate, demand for both water and electric utilities is not likely to let up.

To play the water-and-power sector, you could seek out individual water companies, like American Water Works (AWK), California Water (CWT) and  Aqua America (WTR), or electric utilities such as Consolidated Edison (ED), Pepco Holdings (POM) or Wisconsin Energy (WEC) -- to name but a few.

Or you could buy an ETF or two. Clearly, the ETF option may be easier for investor wanting some exposure to the sector. 

My recommendations for the ETF investor would be to purchase, on the electric side, the Vanguard Utilities ETF (VPU) or SPDR Utilities Select Sector Fund (XLU), with PowerShares Water Resources Portfolio (PHO) or Claymore S&P Global Water Index ETF (CGW) on the water side.

Of the four funds, I would favor XLU and PHO, given that they have far better average daily trading volumes than CGW or VPU. If you wanted to buy only one utility ETF, I would recommend XLU. It has the best daily trading volume but also pays a 3.6% dividend.

With the outlook for global growth slowing, and consumer staples exhausting their run according to some market watchers, electric utilities in general, and XLU shares in particular, look like good places to be for the near term.

At the time of publication, Versace had no positions in any of the stocks or funds mentioned.