Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the utility industry to thrive over time as our growing population demands energy and communication services, among other things, the First Trust Utilities AlphaDEX ETF (NYS: FXU) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously. The index focuses on utilities companies in the Russell 1000 and eliminates the least-promising 25% of them, using several factors.
ETFs often sport lower expense ratios than their mutual fund cousins. The First Trust ETF's expense ratio -- its annual fee -- is 0.70%. That's higher than many ETFs, but also considerably lower than the typical stock mutual fund. The fund is fairly small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has performed well, handily beating the world markets over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
What's in it?
Several utility companies had strong performances over the past year. Duke Energy, for example, soared 29% as it took advantage of low natural gas prices to produce energy, and as it continued investing heavily in renewable energy.
Natural gas and electricity company PPL (NYS: PPL) gained 5%. It's not a fast grower, but it recently yielded 5.2%, which beats most alternatives. It has been seeking rate increases, which would strengthen its condition, and it offers geographic diversification, as it operates in the U.S. and the U.K.
Plenty of other companies didn't do as well last year, but could see their fortunes change in the coming years. Frontier Communications (NAS: FTR) , for example, sank 47%, as investors fretted over its steep debt levels and its landline business, in an increasingly mobile world. Even after a dividend cut, it offers a whopping dividend yield recently above 10%, and it's growing its broadband business, too. It has fallen so far that some see it as undervalued now.
Level 3 Communications (NYS: LVLT) shed 41%. It sports some attractive numbers, such as growing revenue and margins, but it's still buried under a mountain of debt, and hasn't been a great generator of cash. It doesn't look like its potential benefits outweigh its risks yet.
Even worse, NII Holdings (NAS: NIHD) dropped by 76%. It's a mobile communications company operating in Latin America, which should sound promising, as that region's economies are growing faster than ours. But it faces tough competition. Despite adding customers, its profit margins have been shrinking, and so has its bottom line. It's building out its 3G services, though, and management is bullish about prospects in Brazil, among other things.
The big picture
Demand for utilities isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
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