Why the Utility Sector Is Worthy

Editor's Note: This article was written by Kevin Grewal, editor of SmartStops.net.


As the energy sector remains attractive, many investors have rushed toward energy equities and energy ETFs, but the utility sector could be just as a good of a play for various reasons.

First, the vast majority of major utilities use coal and natural gas to generate power. In fact, electricity prices are primarily driven by the price of coal and natural gas, in addition to market forces influenced by supply and demand. With this in mind, it's relatively easy to see the high correlation between the energy and utility sectors.

Secondly, utilities have started to get over their biggest hurdle, government legislation on greenhouse gases, which has been known to drive up operational costs. In fact, a group of utility companies have come together and formed the American Businesses for Clean Energy, which is pushing for clean energy initiatives which will make then benefit from new energy policies.

Thirdly, many utility companies will benefit from President Barack Obama's new initiative to help fund an energy grid modernization. The Obama administration announced that it will distribute to some utilities, private companies, and municipalities grants in the range of $400,000 to $200 million to build a smart-energy grid. Many believe that once implemented, the new energy grid modernization will decrease consumer dependency on electricity, cutting into utility revenues, but this will likely not take place for many years to come.

Lastly, utility stocks are known to pay out high dividends, which could be a good thing to add to a portfolio in the case of deflation. They're also known to have relatively low betas, which could help lower the risk levels of a portfolio.

Some well-diversified utility plays that enable one to gain access to large utilities like Exelon Corporation (XLC) and Southern Company (SO) include the following:
 

• The Vanguard Utilities ETF (VPU), which closed at $62.26 on Thursday.
• The iShares Dow Jones US Utilities Sector Index Fund (IDU), which closed at $71.55 on Thursday.
• The Utilities Select Sector SPDR (XLU), which closed at $29.38 on Thursday.

When investing in equities it's important to keep in mind the inherent risks involved. To help mitigate these risks, implementing an exit strategy is of utmost importance. According to the latest data at www.SmartStops.net, an upward trend in the previously mentioned equities could come to an end at the following price points: VPU at $61.61; IDU at $70.85; XLU at $29.27. These price points change on a daily basis and updated data can be found at www.SmartStops.net.