Make Money in Growing Utility Stocks -- the Easy Way
Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you're interested in investing in utility companies because you see demand for energy and communication growing over time and you like the sturdiness of the industry, the Guggenheim S&P 500 Equal Weight UtilitiesETF (NYS: RYU) 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.
ETFs often sport lower expense ratios than their mutual fund cousins. The utility ETF's expense ratio -- its annual fee -- is a relatively low 0.50%. An interesting detail about this particular ETF is that it holds its components in equal proportion, instead of weighting them by market cap, as is often done. The ETF 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 doesn't sport the best performance, lagging the S&P 500 over the past three and five years. It did fare well during that time compared to its utility peers, though. 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.
With a low turnover rate of 15%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
The huge electric company Southern (NYS: SO) is an example of a utility that had a strong performance over the past year. It gained 22%, and appeals to many because of its low volatility and solid dividend, recently yielding more than 4%. Its earnings have been growing more briskly lately, though the company does carry significant debt.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. Telecom CenturyLink (NYS: CTL) , which the ETF treats as a utility, gained just 2%, but it's offering investors a tantalizing 7.5% dividend yield, which appears to be safe. The telecom company has been losing traditional telephone accounts, but has been selling high-speed Internet access and television service subscriptions.
Yielding about 4%, electric utility Exelon (NYS: EXC) shed 1%, pressured, along with its peers, by the low cost of natural gas. After the Fukushima disaster in Japan, some worried about Exelon's involvement in nuclear energy, but public support for nuclear power doesn't seem to have plunged. The company remains strong, and generates a lot of cash flow.
Wireless provider Sprint-Nextel (NYS: S) , down 42%, is in shakier territory. It bet on the wrong horse as it built its 4G WiMAX network, and is now developing an LTE one. On the plus side, it has teamed up with Google to integrate Google Voice into its service, and has jumped on the iPhone bandwagon, as well. Still, some worry about its future.
The big picture
Demand for energy and telecommunication services isn't going away any time 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.
At the time this article was published LongtimeFool contributorSelena Maranjian,whom you canfollow on Twitter, owns shares of Google, but she holds no other position in any company mentioned.Click hereto see her holdings and a short bio. The Motley Fool owns shares of Google.Motley Fool newsletter serviceshave recommended buying shares of Google, Southern, and Exelon, as well as writing a covered strangle position in Exelon. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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