A Unique Way to Play Utilities

04/10/2013 9:45 am EST

Focus: ETFs

Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

This portfolio of utility bonds may be perfect for an investor seeking exposure to the sector and its income opportunities, writes Roger Conrad of Utility Forecaster.

Investment-grade utilities now routinely sell 30-year debt at 4% and less. That makes sector fixed-income bargains tough to come by, even leaving aside the problem of limited liquidity.

One potential alternative: iShares Utilities Sector Bond Fund (AMPS). This exchange traded fund (ETF) holds an unmanaged portfolio of bonds tracking the Barclays US Aggressive Utility Total Return Value Unhedged US Dollar Index.

More than 98% of holdings are issued by electric, pipeline, gas distribution, and water companies. Slightly  less than 93% are US dollar-denominated, with 5% in the Canadian dollar and the rest in the British pound.

Leverage is not used, the expense ratio is 0.3%, average maturity is in the seven-year range, and credit quality is low investment-grade.

There are limitations, including low liquidity (the fund’s market value is $10.22 million) and a short trading history (it debuted February 14, 2012). The latter is mitigated by company quality, broad diversification (77 names), and balance: No holding is larger than 3%.

Working through an experienced broker may be essential for hurdling liquidity issues. For example, there’s a “creation fee” of $300 and “creation unit size” of 100,000. And there’s no assurance that issuer BlackRock Advisors won’t eventually fold this ETF.

With those caveats, I’m replacing the Verizon Communications 5.25% note of April 15, 2013, which matures later this month, with iShares Utilities Sector Bond Fund. But I continue to prefer the individual bonds in the Portfolio if you can get them below target prices.

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