Summary Very Concise with some excellent defensive holdings. Low beta, good average cash flow and dividends. Also has the potential for capital appreciation. Recent events have put investors on the defensive against the increasing potential of a global economic contraction. It might be a good idea for the individual investor to channel funds towards defense, too. However, as it is with financial markets, the flight to safety will inevitably drive ‘defensive’ asset prices up and thus valuations beyond what is sensible. So how may the individual investor play defense without over paying? There just might be a solution. What drives utilities in the first place? The Housing market does, for one! Since new construction, either single family homes or multiple unit construction require utility services, particularly, gas, water, electricity and data , the recovering U.S. housing market has given a boost to the utility sector. According to the U.S. Department of Housing and Urban Development 883,000 units were complete in 2014 and the annualized 2015 rate, based on July data, will result in a seasonally adjust rate of 987,000. Further, it’s important to observe that utility service isn’t simply a ‘one-time-installation’. It is the unit dwelling, itself, generating revenue for the utility for decades, as long as it’s occupied. (click to enlarge) The PowerShares S&P SmallCap Utilities Portfolio ETF (NASDAQ: PSCU ) is a top performer in its ETF class. So straight away, it seems as though there’s uniqueness in the theme not found in other funds. Although uniqueness may be a winning quality in the arts and sciences, investors require more substance. So then, what makes this fund a good performer? According to Invesco : … The PowerShares S&P SmallCap Utilities Portfolio ((fund)) is based on the S&P SmallCap 600 ® Capped Utilities & Telecom Services Index … …companies are principally engaged in providing either energy, water or natural gas utilities, as well as services designed to promote or enhance the transmission of voice, data and video over various communications media, including wireline, wireless (terrestrial-based), satellite and cable … The interesting feature is that the fund meets its objective with only 20 holdings (as of mid-September). Before going into the individual holdings, it’s worth noting the subsector allocations. Data from Invesco With a mere 20 companies, it seems superfluous to analyze the ten heaviest weightings. It’s worth noting that 52.489% of the fund is concentrated in its top 7 holdings. Also, upon careful examination of the individual company businesses, there are few ‘pure-play’ utilities in the fund. For example, Piedmont Gas (NYSE: PNY ) is a ‘pure-play’ in natural gas, distribution pipeline and storage, including LNG. Piedmont is the heaviest weighted of the fund’s holdings at 9.964%, contributes a 3.47% dividend, has a P/E of 21.15, a price to book multiple of 2.14, price to cash flow of 10.74 and a high but sustainable payout ratio of almost 72%. American States Water (NYSE: AWR ) is more typical of the basic utility providers in the fund, distributing water through its pipeline network, which includes wells, reservoirs, and water treatment facilities. However, it also diversifies into electrical transmission infrastructure and a gas fueled electric generating plant. AWR provides a 2.26% dividend, with a P/E of 24.5, price to book of 3.10 times, price to cash flow of 14.16 times and a payout ratio of 52.49%. On the extreme end there’s Avista Corp (NYSE: AVA ) which comprises 4.54% of the fund’s total holdings. Although its primary business is to provide natural gas and electricity services , it also has real estate investments, provides venture capital and sheet metal fabrication for electrical enclosures, digital device parts, as well as parts for renewable energy systems and the medical industry, and lastly investments in mining. (According to Reuters, these ‘sub-segments’, “… do not form part of any reporting segment …”). Avista pays a 4.20% dividend, a P/E ratio of 17.57%, a price to book multiple of 1.29, a price to cash flow multiple of 7.69 and has a high but sustainable payout ratio of just over 72%. Piedmont, American States Water and Avista are in the top half of the fund’s weightings. Interestingly, all the telecoms are in the bottom half of the fund’s weightings. Only three of the 7 telecom holdings pay dividends. Top Half Holdings Type Weight Market Cap (billions) Yield P/E Beta Payout Ratio Piedmont Gas, Storage 9.964% $3.123 3.47% 21.15 0.47 71.98% UIL Holdings (NYSE: UIL ) Electric and Gas 8.986% $2.719 3.60% 23.23 0.47 41.37% Southwest Gas (NYSE: SWX ) Gas, Construction 8.621% $2.607 2.92% 18.85 0.63 52.90% Northwestern Corp (NYSE: NWE ) Electricity and Natural Gas 7.906% $2.391 3.78% 15.05 0.52 73.30% New Jersey Resources (NYSE: NJR ) Gas and renewables 7.866% $2.379 3.45% 15.72 0.57 50.23% Consolidated Communications (NASDAQ: CNSL ) Network, Video, Voice, Data, Landline 4.59% $1.005 7.79% N/A 0.74 N/A American States Water Water, Electric infrastructure 4.556% $1.475 2.26% 24.49 0.56 52.49% South Jersey Industries (NYSE: SJI ) Gas and Electric 4.554% $1.636 4.21% 15.23 0.73 62.93% Northwest Natural Gas (NYSE: NWN ) Gas and Electric 4.544% $1.217 4.18% 24.14 0.30 49.89% Avista Corp Electric, Gas, RE, Venture funds, metal manufacturing 4.54% $1.957 4.20% 17.57 0.57 72.29% All Tabled Data From Reuters, YaHoo! and PowerShares The lower half weightings of the fund contains those Telecommunications Services. Lumos (NASDAQ: LMOS ) , 1.42% of total holdings contributes a 4.66% dividend yield to the fund. Lumos provides mainly fiber optic infrastructure for voice, data, IP service and also provides wireless. The company as a low P/E of just over 13 times, a price to book of 2.7 times, price to cash flow of 4.14 and a low payout ratio of 32.61%. Generally, it focuses on the fiber optic backbone and related services. On the other hand Atlantic Tele-Network (NASDAQ: ATNI ) , at 4.06% of the fund, is a holding company providing land-line, wireless telephony, data, DSL and provides electricity through solar power generation. Further, Atlantic Tele-Network services the Caisos, Turks, Aruba, Guyana and the U.S. Virgin Islands. ATNI does not contribute a dividend to the fund. The company has a P/E of 35.21, price to book of 1.74 times and price to cash flow of 11.68. It has revenues of about $353.57 million with 8.5% year over year revenue growth. Bottom Half Holdings Type Weight Market Cap (billions) Yield P/E Beta Payout Ratio Laclede Group (NYSE: LG ) Gas 4.537% $2.252 3.54% 16.03 0.36 42.55% El Paso Electric (NYSE: EE ) Electric, Renewables 4.493% $1.431 3.33% 17.61 0.32 56.51% Allete (NYSE: ALE ) Water, Electric, Renewables, Coal 4.422% $2.360 4.18% 16.10 0.74 61.20% Atlantic Tele-Network Wireless, Wired, Broadband, International and Domestic 4.061% $1.202 1.75% 35.21 0.96 55.37% 8×8 (NASDAQ: EGHT ) Telecom, Telephony, Video Cnfrc 3.813% $0.739 0.00% 536.29 0.41 0.00% Cincinnati Bell (NYSE: CBB ) Telecom, VOIP, Wireless 3.71% $0.719 0.00% 5.96 1.17 0.00% Iridium (NASDAQ: IRDM ) Satellite, global communications 2.851% $0.651 0.00% 11.82 0.87 0.00% General Communications (NASDAQ: GNCMA ) Wireless and Landline Tel 2.748% $0.694 0.00% N/A 1.31 0.00% Spok Holdings (NASDAQ: SPOK ) Enterprise Communication Solutions 1.817% $0.352 3.05% 19.15 0.70 58.57% Lumos Networks Fiber optics, VOIP 1.42% $0.276 4.66% 13.93 0.01 32.61% All Tabled Data From Reuters, Yahoo! and PowerShares Only four of the 20 holdings do not pay a dividend, yet the average yield of the dividend paying companies is just over 3.00% and has an average payout ratio of 41.70%. The average market capitalization is indeed in the ‘small-cap’ range at $1.559 billion and the fund has low volatility with an average beta of 0.62 and the shares are marginable With the exception of 2015, the fund’s share price has had respectable, steady returns. The fund’s P/E is 19.99, has 400,000 shares outstanding and has a low trading volume. Lastly, the fund is currently trading at a discount to its NAV and the 0.29% total expense ratio is well below the ETF industry average of 0.44%. The point of the matter is that PSCU is concise with some pretty smart picks, has a good dividend yield, is mainly in a defensive sector, yet has potential for capital appreciation through its telecommunication service holdings, yet is a relatively lightly traded fund. Period YTD 1-Year 3-Year 5-Year Inception 4/7/2010 Share Price -6.34% 2.25% 9.96% 12.56% 10.67% All Tabled Data From Reuters, YaHoo! and PowerShares It seems to be the type of defensive investment that will perform reasonably well in both good and bad economic cycles and in particular a fund that may serve as a long term holding.