Why The Pros Are Watching the XLU

Utility stocks haven’t had an easy go of things lately.

Interest rates made their dividend yields while simultaneously making any new debt they issued more expensive.

Then there’s Hawaiian Electric and their mess.

Yet, financial pros have started to look at the sector with more interest, specifically the S&P Utilities XLU ETF.

With a dividend yield at 3.55%, it pays less than most Treasuries.

So, is this ETF cheap enough to consider for your portfolio?

Key Facts About XLU

• Net assets: $13.91 billion
• 12-month trailing yield: 3.55 %
• Inception: December 16, 1998
• Expense ratio: 0.10%
• Number of holdings: 31

Every time you flick the switch or flush the toilet, you can thank your utility company.

Most of us don’t have a choice in who we use, which makes their business model so lucrative.

Utility companies produce power, gas, and water through a capital-intensive, but simple model.

Since we can’t live without power or water, their revenues rarely fluctuate much. However, they operate on such thin margins with high debt leverage that even a mild recession can cause serious problems.

The XLU is the most popular utility ETF, holding 31 of the largest power, gas, and water companies in the U.S.

Source: StateStreet

Utilities are broken down into electric, water, gas, and multi (provide two or more of the other three).

Source: StateStreet

Performance

While the regular dividend payouts provide some cushion against drawdowns, utilities don’t make much over time.

In fact, over the last 5-years, the XLU’s total returns, including dividends, are less than 30%, making it the second worst-performing sector in the S&P, right behind real estate.

Source: StateStreet

Competition

There are only a few utility ETFs out there. Unfortunately, only three have enough volume that we’d consider recommending: XLU, UTSL, and VPU.

• Direxion Daily Utilities Bull 3X Shares (UTSL): This leveraged ETF exposes holders 3x the daily price movement of the S&P 500 Utility Index.
• Vanguard Utilities ETF (VPU): Vanguard’s Utilities ETF holds a broader set of US utility companies and is market-cap weighted.
• ProShares Ultra Short Utilities (SDP): If you want to bet against the S&P 500 Utility sector, the SDP exposes holders to 2x the daily movement of the index. 
• iShares U.S. Utilities ETF (IDU): If you’re looking for something a little different, the IDU is a float-adjusted market-cap weighted portfolio of large-cap US utility companies.

What you’ll notice below is the leveraged funds come with pricey expense ratios.

Notably, the volumes for every ETF other than the XLU are low. And all of them have a worse 5-year performance.

Our Opinion 10/10 

The XLU isn’t just the best utilities ETF out there; it’s the ONLY one we’d even consider.

Others fail to impress with low volumes, high expense ratios, and excess leverage.

There’s simply no reason to choose another utility ETF than the XLU.

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