A low-cost, high-yielding utilities sector ETF

In a low-rate environment, this large, liquid ETF, which holds the biggest U.S. utilities firms, could offer some appeal.

Robert Goldsborough 27 October, 2015 | 5:00PM
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For investors seeking broad exposure to defensive, high-yielding United States utilities companies,  Utilities Select Sector SPDR (XLU) is a strong, appealing option. This low-cost exchange-traded fund contains only stable mid- and large-cap U.S. utilities firms, as it only holds companies that are included in the S&P 500. The fund follows a market-cap-weighting scheme, where larger companies tend to hold more sway. Over time, that has led to mixed performance. During periods when large- and mid-cap names outperform smaller-cap ones, this fund does better than an equal-weight option, while during periods where small- and mid-cap names tend to outperform larger utilities names, an equal-weight utilities ETF would perform better.

XLU tracks the Utilities Sector Select Index, investing in all 29 utilities companies in the S&P 500. Holdings include regulated utilities, diversified utilities and unregulated power generators. Electric utilities represent 56.5% of the portfolio, but diversified utilities also have meaningful weight (almost 40%). Independent power producers and energy traders and gas utilities, respectively, account for 2% and 1.5% of the portfolio. Because of its limited number of holdings, the portfolio is highly concentrated. The top 10 holdings soak up more than 60% of the fund's assets.

Many utilities firms are known for their reliability and income generation. This ETF is suitable as a satellite holding for a diversified equity portfolio, given that the U.S. utilities sector makes up only about 3% of the S&P 500. The fund also can serve as a tactical bet on low interest rates and long-term growth in electricity demand.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Duke Energy Corp102.69 USD0.45Rating
Emera Inc58.50 CAD0.10Rating
Exelon Corp51.10 USD-0.21Rating
Hawaiian Electric Industries Inc41.64 USD-0.67Rating
NextEra Energy Inc84.03 USD0.13Rating
PPL Corp29.14 USD-0.27Rating
Southern Co63.98 USD0.42Rating
WEC Energy Group Inc91.34 USD0.31Rating

About Author

Robert Goldsborough

Robert Goldsborough  Robert Goldsborough is an analyst covering equity strategies on Morningstar’s manager research team.

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