Even during a market downturn, the demand for essential services such as those provided by utilities, remains virtually unchanged. Utilities funds are therefore an excellent choice for investors seeking a steady income flow through consistent yields from dividends. This is also why they are primarily considered to be a relatively more conservative investment option. In recent times their forays into emerging markets have led to appreciably higher returns and they offer superior returns at a relatively lower level of risk.
The US equities have enjoyed another year of strong gains this year. The Dow, S&P 500 and the Nasdaq are up 8.7%, 12.3% and 14.1%, respectively so far this year. Fortunately, the momentum is evident in the Utilities mutual funds as well. With 16.9% gains (as of Dec 23), the Utilities sector is the third highest sector equity mutual fund gainer so far this year. Also, among the S&P industry groups, Utilities Select Sector (NYSEARCA:XLU) is the second highest gainer this year as it boasts year-to-date return of 24.1%.
We will be picking the top 3 Utilities mutual funds this year based on their year-to-date returns and favorable Zacks Mutual Fund Rank among others. However, before doing so, let's look at the positives for the sector.
Keep reading our Mutual Fund Commentary section, where we are reporting on performances and best picks from fund families and other categories.
YTD Sector Performance
|Sector Equity Funds||Returns|
|YTD (%)||1 Year (%)|
|Global Real Estate||12.22||13.31|
|Energy Limited Partnership||7.04||8.95|
|Equity Precious Metals||-15.58||-12.19|
Strength in Utilities Sector
The biggest positive as well as the fundamental strength of the utilities is that there is hardly any viable substitute for their services. The global invasion of electrical gadgets and therefore the endless need for electricity and utility services is an added advantage.
The utility operators generate more or less stable earnings unless there are severe factors disrupting their operations. These operators likewise reward their shareholders through the payment of stable and growing dividends.
In their pursuit to improve the standard of services, utility operators have relentlessly pursued research and development work. Keeping the rise in demand and efficient use of power in mind, the operators have brought new smart meters, transmission and distribution lines, and gas pipelines into operation.
Utility operators are also benefiting from ongoing research work in the solar photovoltaic (PV) sector. Solar energy is a growing alternate energy source and the new solar cells with higher conversion rates allow operators to generate more power with fewer solar panels. This enables the operators to lower the cost of generating power from alternate sources as these are generally more expensive than fossil fuel sources.
Apart from spreading business organically, the players in the utility space make strategic mergers and acquisitions, which lead to cost synergies and better utilization of resources. We believe that in a mature energy market like the United States, mergers and acquisitions represent a sure way to enhance market share.
Best Performing Utilities Mutual Funds
We will pick 3 top utilities mutual funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) as we expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.
These funds also have high returns year to date. The funds have relatively low expense ratio and carry no sales load. The maximum initial investment required for these funds is $5000.
Fidelity Select Utilities Portfolio (MUTF:FSUTX) seeks growth of capital. It invests most of its assets in companies related to the utilities industry or firms that earn most of their revenues from utility operations. The non-diversified fund uses fundamental analysis and also looks into market and economic conditions for taking investment decisions.
FSUTX has returned 20.3% year to date. The fund carries an annual expense ratio of 0.80% as compared to category average of 1.28%. FSUTX carries no sales load.
Fidelity Advisor Utilities I (MUTF:FUGIX) invests a majority of its assets in utilities companies and those deriving most of their revenues from utilities sector. The fund invests in both US and non-US companies.
FUGIX has returned 20.2% year to date. The fund carries an annual expense ratio of 0.84% as compared to category average of 1.28%. FUGIX carries no sales load.
MFS Utilities I (MUTF:MMUIX) seeks total return. The fund invests a lion's share of its assets in utilities companies, which are engaged in production, generation and distribution of electric, gas or other types of energy, and those involved in telecommunications and cable business. The fund mostly invests in equities, but may also invest in debt instruments.
MMUIX has returned 12.8% year to date. The fund carries an annual expense ratio of 0.76% as compared to category average of 1.28%. MMUIX carries no sales load.