2 Lower-Risk Utility ETFs That Could Provide Shelter From The Bear Market Storm

  • Editor's Pick

Wall Street is debating how deep the current broad market selloff can get while investors are seeking ways to shelter holdings amid mounting concerns that inflation may linger for longer than expected, dampening economic growth.

The threat of ongoing bear markets is a reminder that preserving wealth in long-term portfolios requires diversification across different sectors. During such turbulent periods, utility stocks receive increased attention.

The sector comprises companies that provide essential services, including water, gas, electricity, and sewage removal. Since their services are deemed necessities, utilities see steady demand regardless of the state of the economy.

As well, as the past year has shown, these companies have the ability to increase prices and pass costs on to customers. Which means they can also enjoy steady earnings growth which enables them to offer stable dividends for long-term shareholders.

Plus, as one of the few corners of the market that show resilience to volatility , the utility sector has outperformed the broad market in 2022. For example, the Dow Jones Utility Index has returned 2.5% since January.

Similarly, the Utilities Select Sector SPDR Fund (NYSE: XLU ) is up 3.4% in 2022. In addition, the fund’s current price supports a dividend yield of 2.59%.

By comparison, the S&P 500 and the Dow Jones Industrial Average have lost around 17.2% and 12.1% over the same period.

Here are two utility exchange-traded funds (ETFs) for those looking for a lower-risk alternative to high-growth names.

1. First Trust Utilities AlphaDEX Fund

  • Current Price: $34.58
  • 52-week range: $29.48 - $35.38
  • Dividend yield: 2.08%
  • Expense ratio: 0.64% per year

The first fund on today’s list is the First Trust Utilities AlphaDEX Fund (NYSE: FXU ) which offers access to large- and mid-capitalization (cap) US utilities. It began trading in May 2007, and net assets are shy of $363 million. Fund managers rely on growth and value metrics, such as price appreciation, cash flow, price-to-sales ratio, and return on assets.

FXU Weekly Chart

The FXU, which tracks the StrataQuant Utilities Index, has 40 holdings. In terms of sub-sectors, we see electricity (65%), gas, water & multi-utilities (27.7%), and water and disposal services (7.3%).

About 40% of the portfolio is held in the leading 10 stocks. They include NRG Energy (NYSE: NRG ); UGI (NYSE: UGI ); Avangrid (NYSE: AGR ); National Fuel Gas Company (NYSE: NFG ); and Exelon (NASDAQ: EXC ).

FXU hit a record high on Apr. 21. The ETF is up 5.8% since January and 11.9% over the past 12 months. Trailing price-to-earnings (P/E) and price-to-book (P/B) ratios stand at 16.62x and 1.91x.

2. iShares Global Utilities ETF

  • Current Price: $65.36
  • 52-week range: $58.86 - $67.69
  • Dividend yield: 2.78%
  • Expense ratio: 0.43% per year

The most recent Utilities Global Market Report highlights that:

“The global utility market is expected to grow from $5,488.88 billion in 2021 to $5.969.68 billion in 2022 at a compound annual growth rate (CAGR) of 8.8%.”

The market could well exceed $8.1 trillion in 2026.

Next (LON: NXT ) on our list is the iShares Global Utilities ETF (NYSE: JXI ), which provides exposure to global utility names. The fund, which tracks the S&P Global 1200 Utilities (Sector) Capped Index, was first launched in September 2006.

JXI Weekly Chart

Close to two-thirds of the companies in JXI come from the US, followed by the UK (6.5%), Spain (6.2%), Italy (4.6%), and Canada (3.5%).

Electric utilities have the most significant slice in the portfolio (59.3%). Next are multi-utilities (29.5%), gas companies (5%), water stocks (2.9%), and independent power producers and energy traders (2.8%).

The ETF has a portfolio of 66 stocks, though the top 10 holdings make up roughly 45% of $194 million in net assets. NextEra Energy (NYSE: NEE ); Duke Energy (NYSE: DUK ); Southern Company (NYSE: SO ); Spain's Iberdrola (BME: IBE ); and Dominion Energy (NYSE: D ) lead the names on the roster.

JXI is up 1% year-to-date and has returned 3.7% over the past 12 months. Trailing P/E and P/B ratios stand at 20.71x and 2.09x. We believe both funds deserve further due diligence and could find a place in long-term portfolios.


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