Beyond XLU: Three Utility ETFs Worth A Look

by on July 16, 2010 | ETFs Mentioned:

As evidenced by the volatile stock in recent months, many investors are unsure of exactly what to expect heading into the second half of the year. Stubbornly high unemployment levels have some predicting a double dip back into a recession, while strong earnings and expectations for continued low interest rates have given others hope that the economy will be able to pull through this rough patch and surge higher during the rest of 2010. Against this uncertain backdrop, many investors are unsure about just how to tweak their portfolios (if at all). Some have long since fled for safe havens, preferring to watch from the sidelines until the storm clouds clear [see Five Safe Haven ETFs]. Others have taken a less drastic course, maintaining equity exposure but shifting down the risk spectrum. One corner of the market that has attracted a lot of attention as of late is the utility sector. Traditionally one of the least volatile industries, utilities offer investors an option for dialing down risk levels while still maintaining equity exposure [also read Three Low Beta Equity ETFs For A Volatile Market].

Most investors looking for exposure to this sector have gravitated towards a single fund in the Utilities Equities ETFdb Category: the Utilities Select Sector SPDR (XLU). The State Street fund has obtained close to three-fifths of all the assets invested in the ETFdb Category, a very impressive market share. While the reasons for liking XLU are easy to grasp–its liquidity and cost efficiency are impressive–it isn’t the only ETF option for utilities exposure. Below, we profile three lesser known ETFs that offer unique exposure and may have slipped below many investors’ radar screens [also see Nine Twists On Sector ETF Investing].

iShares S&P Global Utilities Sector Index Fund (JXI)

In order to seek international utilities exposure, investors must look beyond XLU, which only invests in U.S. stocks. JXI on the other hand allocates almost 60% of its assets towards international companies, with the largest country allocations going towards Germany (10.5%), Japan (10.1%), and France (9.1%). The fund holds 85 companies in total, with the biggest weightings in E.ON (7%), GDF Suez (5.5%), and Rwe AG (3.6%). JXI has a tilt towards larger companies; more than 30% of assets go towards giant cap firms and another 50% or so to large caps. The fund is down more than 10% so far in 2010, as utilities have surprisingly been among the worst performers on the year [see more fundamentals of JXI here].

iShares S&P Global Infrastructure Fund (IGF)

For a specialized play on not only the utility sector but the infrastructure segment of the market as well, IGF offers an interesting choice. The fund allocates just a quarter of its assets to U.S. firms, with Canada, Germany, and France receiving major allocations as well. Like JXI, its top holding is E.ON (4.7%), but the rest of the top three is rounded out by TransCanada Corp (4.6%), and Enbridge (4.3%). IGF is down about 8%, and charges an expense ratio that is slightly below average for the category coming at 0.48%. IGF pays a robust dividend of 3.5%, suggesting that it may be an intriguing choice for investors seeking high levels of current income [see more on IGF's fact sheet].

Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (GRID)

While not a pure play on the utilities sector, the holdings of this fund are intertwined with the utility industry. GRID replicates the Nasdaq OMX Clean Edge Smart Grid Infrastructure Index, a benchmark designed to track the performance of common stocks in the grid and electric energy infrastructure sector. The index includes companies that are primarily engaged and involved in electric grid, electric meters and devices, networks, energy storage and management, and enabling software used by the smart grid infrastructure sector.

GRID is relatively well balanced between U.S. and international companies with close to 60% going towards domestic stocks. Its top holdings include SMA Solar Technology AG (8.5%), Schneider Electric (7.7%), and Quanta Services (7.7%). The fund only holds 32 securities in total and has a heavy focus on smaller firms; 36% of the fund is in mid caps, 29% in small caps, and 13% in micro sized companies. This focus gives investors a different slice of the market that is not available with most of the other ETFs in this category. Despite this differentiation, GRID has also had a rough time so far in 2010, it has posted a loss of almost 10% so far this year [see technical analysis of GRID here].

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Disclosure: No positions at time of writing