Best And Worst: Utilities ETFs, Mutual Funds And Key Holdings

Includes: BULIX, FXU, WGL, XLU
by: David Trainer


Utilities ranks ninth in 2Q15.

Based on aggregations of ratings of nine ETFs and 32 mutual funds.

No ETFs or mutual funds receive our Attractive or Very Attractive rating.

The Utilities sector ranks ninth out of the 10 sectors as detailed in our 2Q15 Sector Ratings report. It gets our Dangerous rating, which is based on an aggregation of ratings of nine ETFs and 32 mutual funds in the Utilities sector.

Figure 1 ranks from best to worst all nine Utilities ETFs and Figure 2 shows the five best and worst rated Utilities mutual funds. Not all Utilities sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 266). This variation creates drastically different investment implications and, therefore, ratings.

Investors should not buy any Utilities ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this sector, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off.

Figure 1: ETFs with the Best & Worst Ratings - Top 5

* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Figure 2: Mutual Funds with the Best & Worst Ratings - Top 5

* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

State Street SPDR Utilities Select Sector Fund (NYSEARCA:XLU) is our top-rated Utilities ETF and American Century Quantitative Equity Utility Fund (MUTF:BULIX) is our top-rated Utilities mutual fund. Both earn our Neutral rating.

First Trust Utilities AlphaDEX Fund (NYSEARCA:FXU) is our worst rated Utilities ETF and Prudential Jennison Utility Fund (MUTF:PRUAX) is our worst rated Utilities mutual fund. FXU earns a Dangerous rating while PRUAX earns a Very Dangerous rating.

81 stocks of the 3000+ we cover are classified as Utilities stocks, but due to style drift, Utilities ETFs and mutual funds hold 181 stocks.

UGI Corporation (NYSE:UGI) is one of our favorite stocks held by Utilities ETFs and mutual funds. It earns our Attractive rating. Since 2008, UGI has grown after-tax profit (NOPAT) by 9% compounded annually and the company currently earns a return on invested capital (ROIC) of 7%. UGI has also generated positive economic earnings for 12 of the past 13 years. With consistent NOPAT growth and a proven track record of creating shareholder value, UGI is ideal for long-term, value-oriented investors. At its current price of ~$36/share, UGI has a price to economic book value (PEBV) ratio of 1.2. This ratio implies the market expects UGI to only grow NOPAT by 20% for the remaining life of the company. Given the past five years of NOPAT growth, this expectation seems rather low, creating a good investment opportunity in UGI.

WGL Holdings Inc. (NYSE:WGL) is one of our least favorite stocks held by Utilities ETFs and mutual funds, and earns our Dangerous rating. Over the past five years, WGL has seen its NOPAT decline by 1% compounded annually. While 2014 saw NOPAT increase from the prior year, WGL's profits are still well below their 2012 levels. WGL currently has a 5% ROIC, placing it in the bottom quintile of all companies we cover, and has generated negative economic earnings every year since 1998. In order to justify its current price of ~$55/share, WGL would have to grow NOPAT by 13% compounded annually for the next 16 years. Given the long term NOPAT decline, this expectation seems out of touch with reality and gives WGL a large downside.

Figures 3 and 4 show the rating landscape of all Utilities ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst ETFs

Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds

Sources: New Constructs, LLC and company filings for figures 1-4.

Disclosure: David Trainer and Allen L. Jackson receive no compensation to write about any specific stock, sector or theme.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.