Revisiting A Risk Off Trade

XLUNo sector can foretell investors’ skittishness or appetite for risk quite the way the utilities sector can. That helps to explain why 2011 was a banner year for the Utilities Select Sector SPDR (NYSE: XLU) and those statements also explain why the largest utilities ETF is down 3.1% in 2012. In fairness to XLU, the fund posted a double-digit gain in 2011 and when the market decided to embrace more risk in January and February of this year, XLU and its constituents were cast aside like yesterday’s newspaper.

 

Well, things might be stating to change and while that might not be good for high beta fare such as energy, financials and technology ETFs, it would be be good for XLU. As macroeconomic headwinds, both foreign and domestic, have suppressed equity returns in recent week, XLU has at least been less bad. The ETF has gained almost two-thirds of a percent in the past week and nearly 1% in the past month.

 

With $6.16 billion in assets under management and an expense ratio of 0.18%, XLU is largest and cheapest utilities ETF and most conservative investors probably won’t complain about a dividend yield that hovers around 4%. That doesn’t mean XLU is the perfect utilities ETF.

 

There are six other domestic utilities ETF on the market including the Vanguard Utilities ETF (NYSE: VPU), the First Trust Utilities AlphaDEX (NYSE: FXU), the Focus Morningstar Utilities ETF (NYSE: FUI), the Guggenheim S&P Equal Weight Utilities ETF (NYSE: XLU) and the PowerShares Dynamic Utilities ETF (NYSE: PUI).

 

While assets under management, average daily volume and expenses are important issues for any ETF investor to consider; the most important consideration of all is returns. On that basis, XLU is sort of a mixed bag in 2012. To its credit, the fund has outperformed its First Trust, Vanguard, iShares and FocusShares rivals. On the other hand, it has delivered roughly the same returns as the Guggenheim S&P Equal Weight Utilities ETF.

 

Of course it should be noted that the PowerShares Dynamic Utilities ETF is the only of the group, not XLU that is positive on a year-to-date basis. To be fair, the PowerShares Dynamic Utilities ETF has a smaller yield than XLU and that does factor into total returns. The difference of over 100 basis points is perhaps too much to ignore for many investors, as it should be, but the reality is there is more to the utilities ETF debate than meets the eye and PUI is a more credible rival to XLU than it has been given credit for being.

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