Utilities: Safety & Yield

03/25/2016 9:00 am EST

Focus: ETFs

Genia Turanova

Editor, Leeb Income Performance

Utilities have long been an essential part of many investors’ income- oriented strategies, typically generate strong and reliable income, explains Genia Turanova, editor of Leeb Income Performance.

Over the last few years, some even cut the payouts; this only confirms one of our main principles: diversification helps. Exposure to more than one stock from a sector usually helps to reduce risks.

ETFs are a useful way to help diversify a portfolio.  And because they do help, we are adding one of the oldest utility-dedicated ETFs to the portfolio. Utilities Select Sector SPDR (XLU) is also one of the cheapest.

Its 0.14 percent expense ratio does not detract much from its yield, which, at the time of this writing, stood at about 3.5%.

The ETF is market-cap weighted, and seeks to provide investment returns that, after fees, correspond to the price and yield of the Select Sector ETF Index.

The index covers the following sub-industries: electric utilities (57.4% of total assets); multi-utilities (39% of the assets); water utilities; multi-utilities; independent power producers and energy traders; and gas utilities.

The top five positions in the ETF are NextEra Energy (NEE), Duke Energy (DUK), Southern Company (SO), Dominion Resources (D) and American Electric Power Company (AEP), with 8.98, 8.49, 7.96, 7.54 and 5.38 percent weight in the ETF, respectively.

The weighted average market cap of the ETF is about $27 billion, and the companies in it range in size from the largest, at about $50 billion market cap, to the smallest, about $3 billion market cap.

This kind of diversification is really hard to obtain through investments in individual companies. Utilities Select Sector SPDR is the Mutual Funds portfolio’s new recommendation.

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By Genia Turanova, Editor of Leeb Income Performance

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