Utilities are one of the major sector groups as defined by the Global Industry Classification Standard (GICS), along with other top-level sectors such as Information Technology, Telecom, Energy, Financials, and others.  GICS has five different Industry groups under the general Utility sector heading:  Electric Utilities, Gas Utilities, Multi-Utilities, Water Utilities, and Independent Power Producers and Energy Traders.

Utility companies can also be defined as to whether they are regulated or non-regulated.  The big utilities in the U.S. are generally regulated monopolies, but they often have divisions that operate as non-regulated entities that openly compete against other players in the electricity, gas and water markets.  In a nod to emerging technologies, GICS notes that the “Independent Power Producers and Energy Traders” industry segment includes companies that produce electricity or power using solar power, wind power, biogas, biomass, clean energy, geothermal, waste, water, and waves.

The Utility sector has undergone major changes in the past several decades as federal and state regulators have tried to partially deregulate the industry and encourage competition.  Still, the bulk of the utility industry remains highly regulated and profits are determined more by regulators than by free-market forces.  This makes the utility business more predictable and less risky than the average business.  The Utility sector is widely considered to be a defensive sector to which investors can turn in times of market stress since it is less affected by the business cycle.  However, the Utility sector in the future will likely become less predictable and more volatile as deregulation slowly expands.

We will first provide a quick description of the ETFs in the Utilities sector and then provide our picks for the sector.

SPDR Utilities Select Sector Fund (XLU ) (issuer web site link ) – This fund, launched in December 1998, has $6.0 billion in assets under management.  The fund has an expense fee of 0.20%.  The fund tracks the Utilities Select Sector Index.  The fund holds 35 U.S.-listed stocks.  The five top holdings are:  Southern Co (8.7%), Exelon (7.0%), Dominion Resources (6.9%), NextEra Energy (5.6%), and Duke Energy (5.7%).

Vanguard Utilities ETF (VPU ) (issuer web site link ) – This fund, launched in January 2004, has $700 million in assets under management.  The fund has an expense fee of 0.24%.  The fund tracks the MSCI U.S. Investable Market Utilities 25/50 Index.  The fund holds 85 U.S.-listed stocks.  The five top holdings are:  Southern Co (6.6%), Exelon (5.5%), Dominion Resources (5.5%), Duke Energy (4.9%), and NextEra Energy (4.5%).

iShares Dow Jones US Utilities Sector Index Fund (IDU ) (issuer web site link ) – This fund, launched in June 2000, has $550 million in assets under management.  The fund has an expense fee of 0.48%.  The fund tracks the Dow Jones U.S. Utilities Index.  The fund holds 74 U.S.-listed stocks.  The five top holdings are:  Southern Co (6.5%), Dominion Resources (5.7%), Exelon Corp (5.5%), Duke Energy  (4.8%), and Nextera Energy  (4.6%).

First Trust Utilities AlphaDEX Fund (FXU ) (issuer web site link ) – This fund, launched in May 2007, has $80 million in assets under management.  The fund has a net expense fee of 0.70%.  The fund tracks the StrataQuant Utilities Index, which uses an active stock selection methodology to try to beat a passive index.  The fund holds 51 U.S.-listed stocks.  The five top holdings are:  Public Service Enterprise Group (3.5%), Time Warner Telecom (3.4%), Entergy Corp (3.3%), Edison International (3.3%), and Oneok (3.3%).

PowerShares Dynamic Utilities Portfolio (PUI ) (issuer web site link ) – This fund, launched in October 2005, has $45 million in assets under management.  The fund has a net expense fee of 0.63%.  The fund tracks the Dynamic Utilities Intellidex Index, which uses an active selection methodology to try to beat a passive index.  The fund holds 60 U.S.-listed stocks with an equal weighting methodology.

Rydex S&P Equal Weight Utilities ETF (RYU ) (issuer web site link ) – This fund, launched in November 2006, has $25 million in assets under management.  The fund has an expense fee of 0.50%.  The fund tracks the S&P 500 Equal Weight Telecommunication Services & Utilities Index.  The fund holds 41 U.S.-listed stocks in an equally-weighted index.

PowerShares S&P SmallCap Utilities Portfolio (PSCU ) (issuer web site link ) – This fund, launched in April 2010, has $45 million in assets under management.  The fund has an expense fee of 0.29%.  The fund tracks the S&P SmallCap 600 Capped Utilities & Telecom Services Index.  The fund holds 22 U.S.-listed stocks.  The five top holdings are:  Piedmont Natural Gas (10.1%), New Jersey Resources (8.7%), UIL Holdings (7.5%), Southwest Gas (7.5%), and South Jersey Industries (6.8%).

Figure 1:  Vanguard Utilities ETF (VPU) versus SPDR Utilities Select Sector Fund (XLU) (live chart link )

Our pick for the U.S. Utility ETF group – Our pick for the U.S. Utility group is the Vanguard Utilities ETF (VPU) due to its better performance over the past five years relative to the SPDR Utilities Select Sector Fund (XLU).  SPDR’s XLU is the granddaddy in the group with $6 billion in assets under management, but we do not regard this as a huge advantage considering that Vanguard’s VPU currently has $700 million in assets under management, which is more than enough to provide liquidity and narrow bid-offer spreads.

We also like Vanguard’s VPU because it holds 85 stocks, which makes it more diversified and less subject to single-company risk than SPDR’s XLU, which holds only 35 stocks.  Vanguard’s VPU has a slightly higher expense rate of 0.24% versus 0.20% for the SPDR XLU, but this is more than offset in our view by the higher returns provided by Vanguard’s VPU in recent years.  The better performance can be seen in Figure 1 on the overlay chart.

We are choosing Vanguard’s VPU over the iShares Dow Jones US Utilities Sector Index Fund (IDU), the third largest ETF in the sector, because Vanguard’s VPU has also provided better returns than iShares’ IDU.  In addition, the expense fee for Vanguard’s VPU of 0.24% is substantially lower than 0.45% for iShares’ IDU.  The other ETFs in this group have relatively low assets under management and in our view do not compete well against the larger ETFs in the group.

There is one leveraged long ETF in the utilities sector, which is the ProShares Ultra Utilities (UPW ) (issuer web site link ).  This fund was launched in January 2007 and tracks twice (2X) the daily performance of the Dow Jones Utilities Index.  This fund has only $10 million in assets under management, which means we recommend staying away from this fund because of doubts about its longevity.

There is one short ETF in the utilities sector, which is the ProShares UltraShort Utilities (SDP ) (issuer web site link ).  This fund was launched in January 2007 and tracks twice the inverse (-2X) of the daily performance of the Dow Jones U.S. Utilities Index.  This fund has only $4 million in assets under management, which means we recommend staying away from this fund because of doubts about its longevity.

iShares S&P Global Utilities Index Fund (JXI ) (issuer web site link ) – This fund, launched in September 2006, has $225 million in assets under management.  The fund has an expense fee of 0.48%.  The fund tracks the S&P Global Utilities Index.  The fund holds 75 globally-listed stocks.  The five top holdings are:  GDF Suez (4.7), E.On Ag (4.5%), National Grid (4.1%), Southern Co (4.0%), Enel (3.3%), and Exelon (3.3%).

WisdomTree Global ex-U.S. Utility Fund (DBU ) (issuer web site link ) – This fund, launched in October 2006, has $30 million in assets under management.  The fund has an expense fee of 0.58%.  The fund tracks the WisdomTree Global ex-US Utility Index.  The fund holds 92 globally-listed stocks.  The five top holdings are:  Light SA (3.2%), Drax Group (2.2%), AES Tiete SA (2.2), Tohoku Electric Power (2.0%), and Just Energy Group (1.84%).

SPDR S&P International Utilities Sector ETF (IPU ) (issuer web site link ) – This fund, launched in July 2008, has $7 million in assets under management.  The fund has an expense fee of 0.50%.  The fund tracks the S&P Developed Ex-U.S. BMI Utilities Sector Index.  The fund holds 56 globally-listed stocks.  The five top holdings are:  GDF Suez (7.4%), E.On Ag (7.1%), National Grid (6.9%), Iberdrola (5.7%), and Enel (5.5%).

iShares MSCI ACWI ex –U.S. Utilities Sector Index Fund (AXUT ) (issuer web site link ) – This fund, launched in July 2010, has $2 million in assets under management.  The fund has an expense fee of 0.48%.  The fund tracks the MSCI All Country World ex USA Utilities Index.  The fund holds 77 globally-listed stocks.  The five top holdings are:  E.On Ag (7.1%), GDF Suez (6.5%), Enel (5.9%), Iberdrola (5.3%), and National Grid (5.2%).

Figure 2:  Vanguard Utilities ETF (VPU) versus iShares S&P Global Utilities Index Fund (JXI) (live chart link )

Our ETF Pick in the Overall Utility Sector – Normally we are more favorably disposed to a global ETF rather than a domestic U.S. ETF because of our strong belief in the theme of global development and because of academic studies showing that the average American investor is underinvested in non-U.S. stocks.  However, in the case of the Utility ETFs, the only substantial global Utilities ETF, the iShares S&P Global Utilities Index Fund (JXI), has woefully underperformed the Vanguard Utilities ETF (VPU), which is our pick for the U.S. Utility ETF sector.  iShares’ JXI has performed so poorly that it is barely above its 2008/09 financial crisis lows and has unperformed Vanguard’s VPU by a remarkable 36 percentage points over the last 5 years, as seen in Figure 2.  Our pick for the entire sector is therefore the Vanguard Utilities ETF (VPU).

Water has become an investment theme in its own right.  Clean water for human consumption is a critical resource but is not in unlimited supply.  In fact, many underground water aquifers are being depleted at alarming rates, and clean water is simply not readily available in many parts of the world.  Better technology is needed to clean and treat waste water and for desalination.  Water infrastructure in much of the developed world is old and decrepit and needs to be replaced.  Water usage for industry and agriculture are also large industries.  Demand for water will grow substantially in coming years and decades as the world population steadily increases and as business expands.

There are four ETFs in this segment.  Some of the companies in this segment are utilities that provide water to customers such as American Water Works (AWK) and Aqua America (WTR).  However, many of the companies in this sector are not utilities and are instead involved in technology and services related to water.  For example, Nalco Holdings (NLC) provides industrial companies with services and technology that helps to reduce their water usage and costs.  Valmont Industries (VMI) is mainly involved with irrigation solutions for agriculture.  Tetra Tech (TTEK) provides water management and infrastructure services.

We will now provide quick description of the four ETFs in the water group.

PowerShares Water Resources Portfolio (PHO ) (issuer web site link ) – This fund, launched in December 2005, has $880 million in assets under management.  The fund has an expense fee of 0.64%.  The fund tracks the Palisades Water Index.  The fund holds 32 U.S.-listed stocks.  The five top holdings are:  Nalco Holding (5.4%), Ameron International (4.8%), Valmont Industries (4.7%), Lindsay Corp (4.5%), and Tetra Tech (4.1%).

PowerShares Global Water Portfolio (PIO ) (issuer web site link ) – This fund, launched in June 2007, has $280 million in assets under management.  The fund has an expense fee of 0.75%.  The fund tracks the Palisades Global Water Index.  The fund holds 29 globally-listed stocks.  The five top holdings are:  Nalco Holding (6.91%), Organo (5.3%), Severn Trent (4.9%), Valmont Industries (4.7%), and Hyflux (4.4%).

Guggenheim S&P Global Water Index ETF (CGW ) (issuer web site link ) – This fund, launched in May 2007, has $190 million in assets under management.  The fund has an expense fee of 0.65%.  The fund tracks the S&P Global Water Index.  The fund holds 49 globally-listed stocks.  The five top holdings are: Geberit Ag, (9.4%), United Utilities Group (7.5%), Severn Trend Plc (6.6%), Nalco Holding (6.6%), American Water Works (6.1%).

First Trust ISE Water Index Fund (FIW ) (issuer web site link ) – This fund, launched in May 2007, has $50 million in assets under management.  The fund has an expense fee of 0.60%.  The fund tracks the ISE Water Index.  The fund holds 37 U.S.-listed stocks.  The five top holdings are:  Nalco Holding (6.1%), American Water Works (4.6%), Energy Recovery (4.5%), Aqua America (4.5%), and Lindsay Corp (4.3%).

Figure 3:  comparison of Guggenheim S&P Global Water Index ETF (CGW), PowerShares Water Resources Portfolio (PHO), and PowerShares Global Water Portfolio (PIO) (live chart link )

Our picks in the water ETF group – In the water ETF group, two of the ETFs include only U.S.-listed stocks while the other two include globally-listed stocks.  For an investor who would like to stick to an ETF with only U.S.-listed stocks, our pick is the PowerShares Water Resources Portfolio (PHO), mainly because of its much larger size at $880 million in assets under management versus its much smaller competitor of the First Trust ISE Water Index Fund (FIW), which currently has only $50 million in assets under management.

Of the two water ETFs that include globally-listed water stocks, our pick is the Guggenheim S&P Global Water ETF (CGW).  Guggenheim’s CGW substantially outperforms PowerShares Global Water Portfolio (PIO) on a monthly chart as seen in Figure 3, and also outperforms PowerShares’ PIO on a weekly chart.  To see the performance comparison on a weekly chart, simply click on the “live chart link” on the title line of Figure 3 and then change the chart frequency to “weekly” and click “draw chart.”

Our pick for the overall water group, including all four water ETFs, is Guggenheim’s CGW due to its better performance than its competitors.   In addition, choosing Guggenheim’s CGW over PowerShares’ PHO, which has only U.S.-listed stocks, is in line with our general preference of choosing global ETFs over ETFs with just U.S-listed stocks because of our strong belief in the theme of global development and the faster-growing business opportunities in the developing world.

By the Barchart.com ETF Research Team

Last Updated:  9/9/2011

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