Although investors now have a firmer grip on the political
picture, and with China and Europe seemingly staving off a crisis
for now, many thought that gains would be easy to come by heading
into the final part of the year. Unfortunately, this has not been
the case as new worries over the economy jumping down the Fiscal
Cliff have weighed on stocks in November.
During the period immediately following the election, equities
were down across the board as threats of tax hikes and spending
cuts pushed many to cash out of their positions. Nowhere was this
more true than in the dividend space, as these, along with high
flyers across the board, took the brunt of the selling pressure
(see Biotech ETFs: a Fiscal Cliff Safe Haven).
This outsized selling isn’t exactly unwarranted either, as
dividend taxes could nearly triple starting in 2013 if nothing is
done to change the terms of the fiscal cliff. Obviously if dividend
taxes end up being closer to 45% than their current level at 15%,
this will drastically change the investment case for several
sectors of the market.
Arguably one that will be the most impacted is utilities. This
space isn’t exactly known for its growth, but thanks to its low
competition and high barriers to entry, has been a stable play that
has become famous for its outsized yields.
Given this reality, much of the investment case for the sector
has been predicated on dividends and lots of them. Now with the
prospect of after-tax yields pretty much being cut in half, some
are clearly starting to reconsider investing in the space (see
Three Excellent Dividend ETFs for Safety and Income).
This has resulted in a huge sell-off in utility ETFs in the
weeks following the election and the shift towards worries over the
fiscal cliff. In fact, over the past one month period, the
utilities S&P 500 segment has easily been the worst performer,
down 10 times more than the second worst performer and roughly a
600 basis point underperformance when compared with the broad
S&P 500 benchmark.
This sell-off is probably a little overdone at this point, even
if tax rates do go up significantly for both dividends and capital
gains. Utilities are among the most stable sectors over long time
periods and the companies in this space are likely to be decent
investments no matter what the overall federal fiscal policy is at
the current juncture.
For these reasons, investors may want to consider now as an
opportune time to play the utility sector for the long-haul. The
space has—arguably—been unfairly beaten down in the recent sell-off
and could be due for a nice bounce once investors get some clarity
on fiscal issues heading into 2013.
If investors are interested in this thesis, we have briefly
highlighted below a few of the biggest utility ETFs on the market,
any of which could make for intriguing picks for long-term oriented
value investors at this time:
Utilities Select Sector SPDR Fund
(XLU)
This is the most popular utility ETF targeting the American
market, charging investors 18 basis points a year in fees. The
product is a pretty high yielder, with dividends, in 30-Day SEC
terms, coming in just under 4% (read 11 Great Dividend ETFs).
The ETF holds about three dozen securities in its basket, with
top weights going towards Duke Energy
(DUK), Southern
Co. (SO), and
Dominion Resources
(D). This gives XLU a
heavy focus on electric utilities, although multi-utilities account
for about 36% of assets as well.
Over the past month, XLU has lost about 7.9%, while the product
currently has a Zacks ETF Rank of 3 or hold and a medium Risk
Rating.
iShares Dow Jones US Utilities Sector Index Fund
(IDU)
This fund tracks the Dow Jones U.S. Utilities Index, charging
investors 47 basis points a year in fees for this service.
Dividends come in a little lighter for this ETF, as the product has
a 30-Day SEC payout of 3.2%.
The product does hold over 60 stocks in its basket though, so it
could offer a more complete look at the sector across market cap
levels. Still, the same three companies that sit atop XLU occupy
the top three spots of IDU (read the Guide to Utility ETF
Investing).
Over the past one month period, IDU has lost about 7.3%,
showcasing another weak performance for the space. Currently, this
ETF does have a Zacks ETF Rank of 1 or Strong Buy, while it also
has a Medium Risk Rating.
Vanguard Utilities ETF
(VPU)
Vanguard’s entrant in the space charges investors 19 basis
points a year in fees while tracking the MSCI US Investable Market
Utilities 25/50 Index. This approach looks to target all utility
stocks, regardless of market cap levels, that are trading in the
U.S., giving the product a 30-Day SEC yield of roughly 3.9%.
VPU does hold the most securities in its basket at just under
80, while it too puts a majority of its assets into the electric
utilities segment. There is a slight shakeup at the top holdings,
as Exelon replaces Dominion in the number three spot, with Dominion
sliding down to number four in this ETF.
This fund is down about 7.4% in the last one month time frame,
putting it in the middle of the three funds on the list. Currently,
this ETF does have a Zacks ETF Rank of 1 or Strong Buy, while it
also has a Medium Risk Rating.
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DOMINION RES VA (D): Free Stock Analysis Report
DUKE ENERGY CP (DUK): Free Stock Analysis Report
ISHARS-DJ UTIL (IDU): ETF Research Reports
SOUTHN COMPANY (SO): Free Stock Analysis Report
VIPERS-UTIL (VPU): ETF Research Reports
SPDR-UTIL SELS (XLU): ETF Research Reports
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