Rules for Utility ETFs.

This is part one of a two-part series on utilities. I believe utilities are an often-ignored investment opportunity. Many view utilities as low or no growth investments designed to provide quarterly dividends that may grow 1-2% per year. I would argue that there are some utilities with great growth prospects, and they pay a respectable dividend. Two examples are Xcel Energy Inc. (XEL) and Duke Energy Corporation (DUK).

Many investors, however, do not like to buy individual stocks. So today I will start with utility ETFs and next week I hope to publish the criteria I have for buying individual utility investments. In the interest of full disclosure, my wife, mother-in-law and one granddaughter own shares of ETF FUTY – Fidelity® MSCI Utilities Index ETF. I buy individual utilities for my IRA, Roth and brokerage accounts.

One easy way to find a good utility ETF is to use Fidelity’s ETF screener. It requires very little effort and little time. The first step, after logging on to your Fidelity account is to select News and Research and then select ETFs.(I also use Seeking Alpha – https://seekingalpha.com/symbol/FUTY/peers/comparison)

Fidelity Investments ETF screener.

On the next screen the easiest approach is to click on the “Start a Screen” box that says “Utilities.”

Select the SECTOR you want to review.

The five tabs that provide additional information include Basic Facts, Income Characteristics, Performance & Risk, Technicals and Analyst Opinions. For me the first stop is “Analyst Opinions.” I downloaded the opinions to Excel and created the following spreadsheet, sorting the data on the XTF rating. (I view XTF as the best ETF rating engine.) As you can see, the top three ETFs in this screen are XLU, VPU and FUTY. I am not a big fan of Morningstar ratings, but they also have a positive view of FUTY with five stars.

Pay attention to the XTF Inc. rating.

The next step is to consider the Net Expense Ratio. Notice the three from my previous screen also have low expense ratios. Notice that all three are USA companies and all are passively managed, multi-Industry ETFs. It is also worth noting the Net Assets of the ETF. I think an ETF should have at least $500 million in assets unless it is a new entry to the market. The winners: FUTY, VPU and XLU.

If the expense ratio is greater than 0.10%, have a good reason for paying more.

You should at least understand the five-year historical returns. History is no indication of future results, but over time it is best to stick with those who have shown results. Again, sorting on five-year returns, the utilities look like the following, with FAN and PUI just inching out VPU, FUTY and XLU. Don’t forget the expense ratio when you look at these numbers! Once again, I lean towards VPU, FUTY and XLU.

Returns are growth and dividends.

Finally, don’t ignore the dividend yield. After all, investors tend to buy utilities for income. Yield matters but again, don’t forget the expense ratio. That eats away at your yield. Also, avoid any investment that issues a K-1 unless you do it in a taxable account and like income tax complexity. I think K-1’s are a real pain in the neck, so I avoid investments that issue K-1’s. Considering the following, XLU, VPU and FUTY clearly fit my criteria. I dislike investments with a lot of turnover, because that means the ETF manager is buying and selling investments more frequently. I like fund managers to have a long-term perspective.

As with all investments, show me the money!

In summary, for a utility ETF, consider the analyst opinions (XTF), expenses, returns and yield. If you are wise, you will hold the investment for the long-term. Ignore market volatility.