Penn Wealth Publishing

2018.11.04 Penn Wealth Report Vol 6 Issue 04

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12 PeNN Wealth RepoRt volume 6 issue 04 04 Nov 2018 Penn Wealth RePoRt Copyright 2018. All Rights Reserved. investment intelligence Utilities Select SPDR® Fund Talk about an unloved corner of the market. While high-flyers like Amazon, Netflix, and Alphabet have been at the top of everyone's buy list for the past several years, value has been out of vogue. And no group wears the value moniker better than utilities. Meanwhile, great American utility compa- nies chug along, generating strong revenues, net income, and dividends for their stakeholders. Take Excelon Corp (EXC $36-$44-$45), one of the utility holdings in the Penn Global Leaders Club. With a market cap of $42 billion and a slim p/e of 11, the company earned $4 billion on the back of $34 billion in revenues last year. And talk about a captive customer base: the company provides power to ten million Americans via its six regulated utilities. If the economy and the markets took a nasty turn down, are these customers going to pull back on their utility usage? That is simply not an option. And that, among other reasons, is the reason why utilities should play an important role in everyone's portfolio. Utility companies have a lot going for them right now; not least of which, they are in a defensive sector of the US economy As for selecting which utilities to buy, this can be a bit tricky. While we own Excelon, for example, the company owns 11 nuclear power plants in the US which could generate a host of headaches—in addition to their 33 gigawatts of power—at any given time. For that reason, we always recommend buying a basket of utilities before picking up individual names. And our favorite basket of utilities comes in the form of XLU, the Utilities Select SPDR® ETF. Inside of this sector, there are six differ- ent industries: electric utilities, gas utilities, multi-utilities, water utilities, independent power producers & energy traders, and renewable elec- tricity. While currently holding only 29 positions, XLU provides a solid cross-section of the indus- try it represents. With an impressively-low expense ratio of 0.13%, this highly-liquid fund has nearly $8 bil- lion in assets under management. It has now been around for twenty years, making it one of the most seasoned ETFs on the market. All of the holdings are based within the United States, and the fund has an average market cap of $34 billion—not too big to inhibit future growth, yet not small enough to raise the risk level of the fund. In fact, XLU has a beta (measure of risk) of just 0.13, meaning it carries about 13% of the risk of the S&P 500. How is the fund correlated to the overall market? Being in the most defensive of the 11 sectors, it tends to do better when growth stocks are faltering. It is also an ideal holding for the late stages of the economic cycle, as a slow- down begins to appear on the horizon. Case in point: over the past month, while the S&P 500 was falling 7.2% and the NASDAQ was shedding 9%, XLU was up 4.82%. This doesn't mean, how- ever, that it performs poorly in a strong market: over the past five years it has an average annual return of 10.89%. The current dividend yield of the fund is 3.34%—about 80% higher than the S&P 500 average yield. Sector Outlook One trend in the utilities sector is clear: the United States, like most other countries, has been turning its back on nuclear power. While these facilities generate a lot of "clean" power, they are incredibly expensive to build and are becoming increasingly costly to maintain. We see companies like Excelon and Southern slowly weening themselves off of their nuclear assets. While the loss of existing nuclear would be a headwind for a number of large utility com- panies, the drop in the corporate tax rate has clearly helped their bottom line. Additionally, as mentioned, investors tend to flock to defensives as the economy slows. While funda- mentally-sound utilities rarely hurt investors in any cycle, they can look downright lucrative in a downturn—which may be closer than we think. Utilities Top Ten XLU Holdings The content of this report reflects the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guarantees can be made and the firm is not liable for any losses incurred by subscribers. This is not a solicitation to buy. Always consult your investment professional before investing any money.

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