MarketWatch's Prestbo: Consider Utility ETFs to Blunt Volatility

Wednesday, 13 Aug 2014 09:33 PM

By Dan Weil

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Utility exchange-traded funds (ETFs) represent an attractive way to counter the stock market's recent volatility, says John Prestbo, former executive director of Dow Jones Indexes. 

"Many impatient investors dismiss utilities as stodgy, slow-growth and exceedingly vulnerable to the inevitable rise in interest rates that will happen at some point," he writes on MarketWatch.

"But lately —and particularly this year—utilities have offered effective counterbalance to the market’s volatility."

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The S&P 500 Utilities Index has returned 8.4 percent so far this year but has dropped 5.8 percent from its July 2 peak. That may amount to a buying opportunity.

Prestbo cites three funds that account for 94 percent of the assets held by utility ETFs. Utilities Select SPDR is No. 1, followed by Vanguard Utilities ETF and iShares U.S. Utilities ETF. All three sport dividend yields over 3 percent.

The SPDR fund has averaged an annualized return of 9.3 percent for the last 10 years, compared with 9.5 percent for the Vanguard fund and 9 percent for the iShares fund, according to Morningstar. 

As for expense ratios, the SPDR fund is at 0.16 percent, the Vanguard fund at 0.14 percent and the iShares fund at 0.46 percent.

USA Today reporter Matt Krantz offers a concise summary of investing in utilities. "Utilities are among the classic 'defensive' companies where profits tend to hold up during the bad times, since the demand for power is constant," he writes.

"But don’t expect these stocks to be runaway winners, either. Since they’re defensive, when investors get excited about the market and economy, utilities are often laggards."

Editor’s Note: Get These 4 Stocks Before 399% Stock Market Rally! 

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