Utility Funds: Low-Risk Trio

03/27/2014 9:00 am EST

Focus: STOCKS

 

For a low-risk investment, look at utility funds; they tend to be conservative, low-beta, defensive, and dividend paying, explains Bruce Vanderveen in Personal Finance.

Utilities provide essential electric and gas to their customers, so their services are always in demand. Surprises, both good and bad, are relatively rare.

In recent years, easily traded and inexpensive ETFs have proliferated. The utility sector alone has 22 of them. Also, established wealth management groups have many utility fund offerings. Below are three of the best to consider.

Utilities Select Sector SPDR ETF (XLU) is the largest utility ETF; it has $5 billion in assets under management and currently has holdings in 32 large (mostly electric) US utilities.

Since the ETF owns a basket of (mostly) low-beta utility stocks, XLU is ideal for passive investors who wish to invest in a safe, broad-based, and dividend-paying US utility fund. XLU currently yields 3.7%.

Including dividends, XLU returned an annual average of 11.2% over the last five years and 11.4% over the last 12 months. The annual expense ratio is low at 0.18%.

Vanguard Utilities ETF (VPU) is similar to XLU. It has the same top ten holdings, but has a more diverse base, with smaller utilities included.

VPU is ideal for passive investors who want a broad-based stake in the US utility industry. The current annual yield is 3.6%.

VPU boasts a five-year return averaging 12% annually, including 12% over the last year. Vanguard funds have low annual expense ratios and VPU, with a 0.14% number, does not disappoint.

Fidelity Select Utilities Portfolio (US:FSUTX) is actively managed and seeks capital appreciation for its investors by investing in the equities of selected North American utility companies.

FSUTX is more concentrated and less diversified in its holdings than most utility funds, so stability and yield may be a concern for some investors. But FSUTX has returned an annualized 14.6% over five years and 17.4% over the last 12 months. There is a 0.79% annual expense ratio.

The above funds all invest in utilities but differ in their focus. XLU and VPU will appeal to passive investors for whom safety and income are paramount, while FSUTX is a little farther out on the risk curve but may offer more potential capital appreciation.

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