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Best & Worst ETFs & Mutual Funds: Utilities Sector

Thursday, October 11th, 2012

The Utilities sector ranks ninth out of the ten sectors as detailed in my sector rankings for ETFs and mutual funds. It gets my Dangerous rating, which is based on aggregation of ratings of eight ETFs and 40 mutual funds in the Utilities sector as of October 11, 2012. Prior reports on the best & worst ETFs and mutual funds in every sector and style are here.

Figure 1 ranks from best to worst all eight 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 22 to 80), which creates drastically different investment implications and ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst ETFs and mutual funds, which allocate too much value to Neutral-or-worse-rated stocks.

To identify the best and avoid the worst ETFs and mutual funds within the Utilities sector, investors need a predictive rating based on (1) stocks ratings of the holdings and (2) the all-in expenses of each ETF and mutual fund. Investors need not rely on backward-looking ratings. My fund rating methodology is detailed here.

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.

Get my ratings on all ETFs and mutual funds in this sector on my free mutual fund and ETF screener.

Figure 1: ETFs with the Best & Worst Ratings

* Best ETFs exclude ETFs with TNA’s less than 100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

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

* Best mutual funds exclude funds with TNA’s less than 100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

First Trust Utilities AlphaDEX Fund (FXU) is my top-rated Utilities ETF and earns my Dangerous rating.  American Century Quantitative Equity Funds, Inc: Utilities Fund (BULIX) is my top-rated Utilities mutual fund and earns my Neutral rating.

Rydex S&P Equal Weight Utilities ETF (RYU) is my worst-rated Utilities ETF and earns my Dangerous rating.  Rydex Series Funds: Utilities Fund (RYUTX) is my worst-rated Utilities mutual fund and earns my Very Dangerous rating.

Figure 3 shows that eight out of the 135 stocks (4% of the total net assets) held by Utilities ETFs and mutual funds get an Attractive-or-better rating. However, none of the eight Utilities ETFs or 40 Utilities mutual funds get an Attractive-or-better rating.

The takeaways are: mutual fund managers allocate too much capital to low-quality stocks and Utilities ETFs hold poor quality stocks.

Figure 3: Utilities Sector Landscape For ETFs, Mutual Funds & Stocks

Sources: New Constructs, LLC and company filings

As detailed in “Cheap Funds Dupe Investors”, the fund industry offers many cheap funds but very few funds with high-quality stocks, or with what I call good portfolio management.

Investors need to tread carefully when considering Utilities ETFs and mutual funds, as none are rated Attractive or better.  Focus on individual stocks instead.

Public Service Electric & Gas Company (PEG) is one of my favorite stocks held by Utilities ETFs and mutual funds and earns my Attractive rating. PEG is a rarity in the Utilities sector – it is in the only company in the Utilities sector to earn an Attractive-or-better rating, and is a business with positive economic earnings and a cheap valuation. PEG has generated a return on invested capital (ROIC) above its weighted average cost of capital (WACC) in five of the last six years. Its current stock price (~$32.48) implies the company’s after-tax profits (NOPAT) will permanently decline by 30%. The market is setting a low bar, and PEG has demonstrated that it can grow NOPAT.

Integrys Energy Group, Inc. (TEG) is one of my least favorite stocks held by Utilities ETFs and mutual funds and earns my Very Dangerous rating. TEG is a value destroyer that has generated negative economic earnings for all but one of the last 15 years. To justify its current stock price (~$55.29), TEG must increase profits by 9.5% compounded annually for the next 15 years. Growth like this is unlikely given the history of poor performance, a mature market, and the regulation faced by all Utilities.

88 stocks of the 3000+ I cover are classified as Utilities stocks, but due to style drift, Utilities ETFs and mutual funds hold 135 stocks.

Figures 4 and 5 show the rating landscape of all Utilities ETFs and mutual funds.

Our sector rankings for ETFs and mutual funds report ranks all sectors and highlights those that offer the best investments.

Figure 4: Separating the Best ETFs From the Worst ETFs

Sources: New Constructs, LLC and company filings

Figure 5: Separating the Best Mutual Funds From the Worst Mutual Funds

Sources: New Constructs, LLC and company filings

Review my full list of ratings and rankings along with reports on all eight ETFs and 40 mutual funds in the Utilities sector.

Disclosure: I receive no compensation to write about any specific stock, sector or theme.

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3 Comments

  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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