It’s been awhile since I provided an update on the Utilities Select Sector Exchange Traded Fund (NYSE: XLU – $56.51), as there has been little change in the composition of the fund’s holdings. The investment in the fund seeks to provide results that correspond generally to the price and yield performance of securities of the companies in the Utilities Select Sector Index. Generally, the fund invests substantially all its assets in the securities comprising the index, which includes companies from the following industries: Electric utilities (62% of the total portfolio); multi-utilities (33%); water utilities (2%); independent power producers and renewable energy (2%); and gas utilities, cash and other (1%). Virtually all (88.5%) of the companies are large-cap holdings with the remaining in the mid-cap category. Of the twenty-eight utilities in the fund, the top-ten represent 60% of the total.
Most electric utility stocks have performed very well in 2017. The XLU, in particular, has advanced about 23.5% over the past 52-weeks and the generous dividend of 3.1%, provided investors with a total return of some 26% over that stretch. Since inception into the income account, the fund has appreciated 73.5%, excluding dividends. The net expense ratio for the fund remains low at 0.14%, as well as the turnover rate. Despite interest-rate increases from the Federal Reserve (and the expectation of more to come), rates are still low, by historical standards, and yields on money-market funds, CD’s and savings accounts remain low enough to be unappealing to some investors seeking income. Valuations for the utilities have climbed, however, due to ongoing consolidation in the industry, and some of the stocks are trading on takeover rumors vs. fundamentals. Nonetheless, input costs, such as natural gas, coal and oil from domestic shale, remain low for the group, which augurs well for utilities’ operating margins. I continue to recommend a 5% allocation in the fund for conservative, income-minded investors.