Penn Wealth Publishing

2016.01.10 Journal of Wealth & Success Vol 4 Issue 1.1

Issue link:

Contents of this Issue


Page 10 of 21

investment intelligence January 10, 2016 wealth & success volume 4 issue 1 11 Copyright 2016. All Rights Reserved. The Utilities Sector SPDR® ETF Remember Enron? When I was a young broker at a major invest- ment firm, our analysts had a "Strong Buy" rating on the company. At the time, it was touted as a powerhouse energy conglomer- ate, and the seventh largest publicly-traded firm in the world. On hindsight, it was really not an energy company at all, but a finan- cially engineered house of mirrors. Like WorldCom, it was staying one step ahead of the law by gobbling up other companies as fast as it could, sucking the value out of them and moving on to the next victim. I mention Enron because many investors considered it a nice, safe, blue chip stock; that is, up until the point they realized their money was gone. Investing in utilities takes a keen eye, as many of the companies hiding out in the industry are wolves in sheep's clothing. Investors must perform their due dili- gence—or hire someone else to—before plunking down their hard-earned money. When I have an income-oriented client who is risk averse, and may not understand the nuances of this sector, we typ- ically start out with a solid utility fund. One of the strongest and most liquid funds I have used in this space is the Utilities Select Sector SPDR® ETF, symbol XLU. With one simple investment, clients can gain access to 30 top-tier, defensive, higher-yielding power providers. The fund selects only mid- and large-cap firms that are established members of the S&P 500, but members include regulated utilities, diversified utili- ties, and unregulated power generators. Firms are selected for the fund based on their strong bal- ance sheets, reliability, and income generation. The fund provides a nice income stream of nearly 4%, plus offers a rela- tively superior potential for price appreciation. Having said that, it should be noted that the fund is down 10% year to date (which happens to be another reason we are re-purchasing it in the PDGS right now), and we see that as a result of a couple of factors. First, as previously mentioned, many investors got too wrapped up in the concern over interest rate hikes and bolted from utilities. Additionally, we have had a very mild winter thus far, putting pressure on the major power providers (natural gas prices just hit a 14-year low). This can change on a dime as we head into the coldest months of the year. We prefer to buy the hybrid exchange traded fund because it gives us a higher degree of safety (the beta on XLU is 0.22) than an individual player, but more liquidity than an open-ended fund. As rates begin their slow ascent, we always have the option to place a stop-loss on this ETF, or sell it intra-day if required. XLU top ten holdings... Symbol Name % Weight NEE NextEra Energy Inc 8.76% DUK Duke Energy Corporation 8.42% SO Southern Co 7.95% D Dominion Resources Inc 7.58% AEP American Electric Power Co Inc 5.32% PCG PG&E Corp 4.99% EXC Exelon Corp 4.55% PPL PPL Corp 4.31% SRE Sempra Energy 4.24% EIX Edison International 3.76% Utilities responded favorably to the whopping sixteen rate hikes made between 2004 and 2006...

Articles in this issue

Archives of this issue

view archives of Penn Wealth Publishing - 2016.01.10 Journal of Wealth & Success Vol 4 Issue 1.1