From the June 2007 issue of Research Magazine • Subscribe!

Utilities Plugging Away

Over the past few years, the dull utilities sector has been turning heads with stock market performance that's been anything but boring.

Through the first quarter of 2007, the Utilities Select Sector SPDR (XLU), which mirrors utility stocks inside the S&P 500, delivered five-year total annualized gains of 11.16 percent. That makes stocks of utility providers one of the best performing S&P sectors (along with basic materials and energy) over the same time period.

Utilities generally consist of companies that produce, generate or distribute electricity or natural gas. Historically, investors have gravitated to these stocks for dividends and stability. Regardless of the economy's status, it's generally believed they're insulated from whatever uncertainty may come from uncooperative financial markets. But now, many investors have been looking to utilities for capital growth, and they've been getting it.

As utilities have enjoyed strong price appreciation, their dividend yields have decreased. For 2007, the Utilities Select Sector SPDR has a forward yield of just 2.90 percent versus 4.69 percent for the 10-year Treasury bond. Nevertheless, utilities still remain one of the highest dividend-paying sectors.

According to New York-based AltaVista Independent Research, the Utilities Select Sector SPDR has a P/E ratio of 17 and compared to other industry sectors has lower correlation to the broader S&P 500. Among top holdings in the Utilities SPDR are Exelon, Dominion Resources, Duke Energy, PG&E, Southern and TXU. The fund charges an annual expense ratio of 0.24 percent.

Other exchange-traded funds that track electricity and natural gas stocks are the Vanguard Utilities ETF (Amex: VPU) and the iShares Dow Jones Utilities Index Fund (Amex: IDU). The Vanguard ETF follows the MSCI U.S. Utilities index, which consists of 89 holdings, and charges an annual expense ratio of 0.25 percent. The iShares fund has 75 holdings and costs shareholders 0.48 percent per year.

Through the first quarter of 2007, the three-year performance for Vanguard Utilities ETF was 21.43 percent, the iShares Dow Jones Utilities Index Fund was 20.89 percent and the Utilities Select Sector SPDR was 21.63 percent.

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Ron DeLegge is the San Diego-based editor of www.etfguide.com.

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