Utility ETFs primarily allocate capital to companies engaged in the provision of public utility services, encompassing vital sectors such as gas, electricity, water, and related critical services.
Typically, these organizations are subject to regulatory oversight and function within a business climate characterized by stability and predictability.
Therefore, utility ETFs have the potential to provide investors with a dependable income stream and serve as a safeguard against fluctuations in the market.
The utilities industry is a critical sector that offers important services to both residential and commercial entities.
The sector encompasses entities engaged in the production, transmission, and distribution of electricity, natural gas, and water resources.
The profitability of enterprises working in this area can be influenced by government authorities that regulate the industry.
Utility firms are renowned for their consistent and foreseeable cash flows, rendering them appealing to investors in search of reliable and constant returns.
Nevertheless, corporations are also susceptible to potential hazards arising from the environment and regulatory factors, which have the potential to influence their financial performance.
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Advantages of Investing in Utility ETFs
One of the notable benefits associated with investing in utility ETFs is their ability to offer a consistent and reliable stream of income to investors.
Utility businesses commonly distribute dividends to their stockholders, thereby offering a consistent source of revenue.
Moreover, utility ETFs exhibit somewhat lower levels of volatility compared to other sectors, rendering them a favourable choice for risk-averse investors seeking to mitigate their risk exposure.
One notable benefit of the utility industry is its inherent defensive characteristic.
Utility firms typically exhibit good performance throughout periods of economic downturns and recessions due to the necessary nature of their services, which are relatively unaffected by fluctuations in consumer demand.
When looking to diversify their holdings, private banking clients typically look into investment funds, such as the top utility ETFs, telecom ETFs, tech ETFs, and biotech ETFs.
Risks of Investing in Utility ETFs
Although the utility ETFs offer numerous benefits, it is not exempt from inherent risks.
One of the foremost hazards encountered in this context is regulatory risk, given the substantial level of regulation imposed on the business and its susceptibility to alterations in governmental policies.
The presence of uncertainty and volatility can have implications for both individual enterprises and utility ETFs in their entirety.
One further concern associated with the utility ETFs pertains to the possibility of increasing interest rates.
Certain utility firms may own substantial levels of debt, and the escalation of interest rates might augment the expenses associated with borrowing, thereby diminishing their profitability.
Therefore, it is important for investors in utility ETFs to be cognizant of the potential consequences that may arise from an increase in interest rates, which could affect their investment holdings.
What are the Best Utility ETFs
Invesco S&P 500 Equal Weight Utilities ETF (NYSE:RSPU)
The Invesco S&P 500 Equal Weight Utilities ETF (NYSE:RSPU) is an exchange-traded fund designed to replicate the performance of the S&P 500 Equal Weight Utilities Plus Index.
Earlier this year, the entity in question underwent a ticker change to RSPU, and presently possesses a total value of $350 million in net assets.
The establishment of this ETF occurred in the year 2006, with its entire portfolio including investments solely in utility stocks.
The top three investments of the Invesco S&P 500 Equal Weight Utilities ETF (NYSE:RSPU) consist of the AES Corporation (NYSE:AES), NRG Energy, Inc. (NYSE:NRG), and Edison International (NYSE:EIX).
At the conclusion of the second quarter of the current year, a total of 39, 36, and 25 hedge funds out of the 910 hedge funds included in the database had made investments in the three aforementioned firms, correspondingly.
Utilities Select Sector SPDR Fund (NYSE:XLU)
The Utilities Select Sector SPDR Fund (NYSE:XLU) holds the distinction of being the most substantial ETF on our roster, as seen by its impressive net asset value of $15.6 billion.
The majority of its principal investments consist of companies that are also included in other ETFs previously discussed.
Additionally, it has allocated funds towards Exelon Corporation (NASDAQ:EXC) and Dominion Energy, Inc. (NYSE:D).
Virtus Reaves Utilities ETF (NYSE:UTES), iShares U.S. Infrastructure ETF (BATS:IFRA), Global X U.S., Infrastructure Development ETF (BATS:PAVE), and Utilities Select Sector SPDR Fund (NYSE:XLU) are considered to be among the top utility ETFs.
First Trust EIP Carbon Impact ETF (NYSE:ECLN)
The First Trust EIP Carbon Impact ETF (NYSE:ECLN) aims to allocate funds towards companies operating in the energy, utility, renewable energy, and related sectors, which demonstrate a commitment to mitigating their carbon emissions and prioritizing environmental sustainability in their business practices.
This particular ETF ranks among the smallest in terms of size, with a total of $36 million in net assets.
The First Trust EIP Carbon Impact ETF (NYSE:ECLN) is a very recent fund, having been established in 2019.
Approximately 70% of the investments made by the entity are allocated to utility firms, with NextEra and American Electric being notable examples of prominent utility investments.
iShares Global Utilities ETF (NYSE:JXI)
The iShares Global Utilities ETF (NYSE: JXI) is an additional ETF managed by iShares. Established in the year 2006, the organization was established with the primary objective of investing in prominent corporations that exhibit substantial worth.
In addition to NextEra and the Southern Company, the organization also possesses significant ownership interests in Enel SpA (OTCMKTS:ENLAY) and American Electric Power Company, Inc. (NASDAQ:AEP).
Virtus Reaves Utilities ETF (NYSE:UTES)
The Virtus Reaves Utilities ETF, listed on the New York Stock Exchange under the ticker symbol UTES, is under the management of Virtus Investment Partners.
Similar to various other utilities ETFs, this particular fund likewise allocates its investments towards value and mid-sized stocks.
The fund was established in 2015 and currently holds a total net asset value of $44.2 million.
The ETF exhibits a price-to-trailing earnings ratio of 20.59. Notably, the fund holds substantial assets in Duke Energy, NextEra Energy, and DTE Energy Company (NYSE:DTE).
It is worth mentioning that DTE Energy Company is associated with 27 out of the 910 hedge funds included in the database, as of June 2023.
iShares U.S. Utilities ETF (NYSE:IDU)
The iShares U.S. Utilities ETF (NYSE:IDU) is affiliated with the iShares fund family, as indicated by its name.
The company possesses net assets valued at $895 million and exhibits a trailing price-to-earnings (P/E) ratio of 21.55.
The portfolio of the fund exhibits a resemblance to the holdings of the Fidelity MSCI Utilities Index, with the top three positions being comparable.
The ETF has an operational history spanning over twenty years, having been established in the year 2000.
iShares U.S. Infrastructure ETF (BATS:IFRA)
The iShares U.S. Infrastructure ETF (BATS:IFRA) is an exchange-traded fund focused on investing in prominent infrastructure operators, particularly those involved in utilities and other significant infrastructure projects.
Upon examining the makeup of the investments, it is observed that 38% of the funds are allocated to utilities, while 35% are allocated to industrial businesses.
Several significant utility investments include NRG Energy, Inc. (NYSE:NRG), EnLink Midstream, LLC (NYSE:ENLC), and Vistra Corp. (NYSE:VST).
The establishment of the fund occurred in the year 2018, and it currently possesses a net asset value of 2.15 billion.
Fidelity MSCI Utilities Index ETF (NYSE:FUTY)
The Fidelity MSCI Utilities Index ETF, listed on the New York Stock Exchange under the ticker symbol FUTY, is an exchange-traded fund focused on the utilities sector. It is overseen and managed by Fidelity Investments.
The organization possesses a total of $1.9 billion in net assets and exhibits a yield of 3.04%.
Over 99% of the portfolio consists of investments in utility firms, with the three most significant holdings being Duke Energy Corporation (NYSE:DUK), NextEra Energy, Inc. (NYSE:NEE), and The Southern Company (NYSE:SO).
Global X U.S. Infrastructure Development ETF (BATS:PAVE)
The Global X U.S. Infrastructure Development ETF (BATS:PAVE) is a substantial ETF that possesses a net asset value of $5 billion, despite its relatively recent establishment in 2017.
The infrastructure ETF focuses on investing in companies engaged in the manufacturing and sale of industrial equipment specifically tailored for utilities.
ClearBridge Sustainable Infrastructure ETF (NASDAQ:INFR)
The ClearBridge Sustainable Infrastructure ETF (NASDAQ: INFR) is classified as a relatively modest exchange-traded fund, boasting a net asset value of $2 million.
The ETF allocates its investments to both value and growth equities, with a significant percentage of its holdings dedicated to the healthcare sector.
However, it is worth noting that the ETF also has substantial stakes in utilities, specifically American Water Works Company, Inc. (NYSE:AWK).
During the June quarter of 2023, a total of 34 hedge funds out of the 910 were identified as investors in American Water Works Company, Inc. (NYSE:AWK).
First Trust Utilities AlphaDEX Fund (NYSE:FXU)
The First Trust Utilities AlphaDEX Fund (NYSE:FXU) is an exchange-traded fund (ETF) of moderate size that largely concentrates on value equities.
The fund’s portfolio predominantly consists of utility businesses, accounting for over 88% of its investments.
Additionally, the fund possesses a net asset value of $306 million. The First Trust Utilities AlphaDEX Fund (NYSE:FXU) comprises Vistra Corp. (NYSE:VST) and Consolidated Edison, Inc. (NYSE:ED) as its primary holdings.
Upon analyzing hedge fund sentiment, it was observed that during the second quarter, a total of 48 hedge funds, as recorded in the database, had engaged in the purchase of shares belonging to Vistra Corp.
In contrast, 30 hedge funds had maintained a stake in Consolidated Edison.
The First Trust Utilities AlphaDEX Fund (NYSE:FXU) is considered one of the top utility exchange-traded funds (ETFs) to invest in, alongside the iShares U.S. Infrastructure ETF (BATS:IFRA), Global X U.S. Infrastructure Development ETF (BATS:PAVE), and Virtus Reaves Utilities ETF (NYSE:UTES). This assessment is based on the ETF’s strong performance in terms of share price.
Vanguard Utilities Index Fund (NYSE:VPU)
The Vanguard Utilities Index Fund (NYSE:VPU) is a prominent exchange-traded fund (ETF) featured in our compilation, boasting a substantial net asset value of $7 billion.
Similar to the First Trust Utilities AlphaDEX ETF, this investment vehicle likewise allocates its funds towards value and mid-sized stocks.
The fund’s portfolio mostly consists of utility companies, accounting for around 99% of its holdings.
The three largest holdings within the portfolio are NextEra Energy, Inc. (NYSE:NEE), Duke Energy Corporation (NYSE:DUK), Suncor Energy Inc. (NYSE:SU).
The number of hedge fund investors in the aforementioned entities, as recorded in the database for the second quarter of 2023, is 39, 59, and 33, respectively.
Final Thoughts
Utility ETFs offer investors a reliable and consistent stream of earnings, while also serving as a safeguard against market fluctuations.
This is mostly attributed to the industry’s regulated and defensive characteristics.
Nonetheless, the presence of regulatory risk and the upward trajectory of interest rates pose notable issues.
Investors have the potential to reduce these risks by implementing diversification strategies, such as allocating their investments among many individual firms within the utility sector or exploring alternative sectors like healthcare, biotechnology, growth-oriented industries, or emerging markets.
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