Nearly six months into 2016, many investors know the deal with utilities stocks. The sector with a reputation for lulling the investment community to sleep is, in a good way, betraying that reputation. Just look at the Utilities SPDR (ETF) (XLU).
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XLU, the largest utilities exchange-traded fund, is up 16.8 percent year-to-date. That deals a blow to peanut gallery that has consistently said utilities stocks have rallied too far too fast and that the Federal Reserve is bound to raise interest rates. Keep saying something and it is bound to happen.
Last Friday, 16 ETFs hit all-time highs and five were utilities funds, including the PowerShares Dynamic Utilities (ETF) (PUI). As has been noted, there are alternatives to the prosaic utilities ETFs so many investors are embracing this year, and many of these alternatives are making it worthwhile to explore something different.
Pounce On PUI
PUI fits that bill with a year-to-date gain of nearly 19 percent, putting it ahead of cap-weighted utilities ETFs by about 200 basis points on average. PUI follows the Dorsey Wright Utilities Technical Leaders Index, which is designed to identify companies that are showing relative strength (momentum), and is composed of at least 30 common stocks from the NASDAQ US Benchmark Index, according to PowerShares.
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For the bulk of this year, utilities ETFs, cap-weighted and equal-weight funds, have been surging with a big helping hand from a Federal Reserve reluctant to boost interest rates. PUI benefits from the same theme, although its momentum-based strategy ensures it benefits in different fashion. Traditional utilities are often heavily allocated to large caps.
PUI Does Diversity
PUI is arguably one of the more diverse utilities ETFs in terms of cap exposure. In fact, large-cap utilities account for just 27 percent of the fund's weight, roughly equivalent to the ETF's small-cap allocation. Mid-cap utilities are 45.6 percent of PUI's 34-stock lineup.
The average market capitalization of PUI's holdings is $15.2 billion. By comparison, the weighted averaged market value of XLU's holdings is $30.8 billion.
Due to its tilt toward smaller stocks, PUI yields less than cap-weighted rivals at 2.36 percent. XLU yields 3.27 percent, but PUI's dividend yield of 2.36 percent is still 72 basis points above last Friday's closing yield on 10-year Treasurys.
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