The ETF Advisor: Utility ETFs Promise Low Volatility and Steady Dividends

For its combination of relatively high current yield, low cost, overweight ranking, and large size, the consensus choice is Utilities Select Sector SPDR ETF (XLU Overweight). With $3.2 billion in assets, it is three times the size of the second largest of the group. Its current yield of about 4.15%–paid quarterly–is at the high end of the group, as is its one-year return of 20.5%. The fund has the same top three holdings, Exelon (EXC ****), Southern Co. (SO ***), and Dominion Resources (D ***), as several other funds in the group.

A much different take on utilities is available from the First Trust Utilities AlphaDEX Fund (FXU Marketweight). The fund tracks the StrataQuant Utilities Index, an "enhanced" index since it is reconstituted quarterly. It is the only utility fund that has independent energy producers such as NRG Energy (NRG ****) and Mirant (MIR ****) in its top 10 holdings, and one of the few funds that own telecom stocks. While the fund may be small at just $33 million in assets, it has grown steadily since it opened in May, 2007 and has doubled in size since December 2008. It pays dividends semi-annually, a drawback for some, and its 30-day SEC yield is low at 2.96%. It has the best one year performance of any straight utility fund as of early May with a return of 27.6%.

Nuclear power proponents might look at the iShares S&P Global Nuclear Energy Index Fund (NUCL Overweight), one of three funds targeting nuclear power-related stocks. It owns companies involved in uranium mining, reactor design, and construction, as well as a mostly European group of nuclear operators. In doing so, it manages to steer clear of some of the large Japanese conglomerates such as Toshiba and Hitachi that are important to the nuclear power industry, but for whom nuclear power is a relatively small business.

[Note: The fund rankings in this article--from five star (best) to one star (worst)--are quantitatively derived from performance, holdings, risk, and expense analysis. The stock rankings, or STARS, using a scale of 5-STARS (strong buy) to 1-STARS (strong sell), are based on S&P equity analysts' qualitative and fundamentally driven outlook for the stock over the next 12 months.]