Best And Worst Q4’15: Utilities ETFs, Mutual Funds And Key Holdings
Summary The Utilities sector ranks fifth in Q4’15. Based on an aggregation of ratings of nine ETFs and 25 mutual funds. RYU is our top-rated Utilities sector ETF and BULIX is our top-rated Utilities sector mutual fund. The Utilities sector ranks fifth out of the ten sectors as detailed in our Q4’15 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Utilities sector ranked eighth. It gets our Neutral rating, which is based on an aggregation of ratings of nine ETFs and 25 mutual funds in the Utilities sector. See a recap of our Q3’15 Sector Ratings here . Figure 1 ranks from best to worst the nine Utilities ETFs that meet our liquidity standards 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 20 to 81). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Utilities sector should buy the Attractive rated mutual fund from Figure 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs 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 (click to enlarge) * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Guggenheim S&P Equal Weight Utilities ETF (NYSEARCA: RYU ) is the top-rated Utilities ETF and the American Century Quantitative Equity Funds Utilities Fund (MUTF: BULIX ) is the top-rated Utilities mutual fund. RYU earns a Neutral rating and BULIX earns an Attractive rating. The PowerShares S&P SmallCap Utilities Portfolio ETF (NASDAQ: PSCU ) is the worst-rated Utilities ETF and the Rydex Utilities Fund (MUTF: RYUTX ) is the worst-rated Utilities mutual fund. Both earn a Very Dangerous rating. 79 stocks of the 3000+ we cover are classified as Utilities stocks, but due to style drift, Utilities ETFs and mutual funds hold 81 stocks. PPL Corporation (NYSE: PPL ) is our favorite stock in the Utilities sector and is the only Utilities stock that earns an Attractive-or-better rating. Since 2010, PPL has grown after-tax profit ( NOPAT ) by 9% compounded annually. While PPL’s 6% return on invested capital ( ROIC ) may not seem impressive, it ranks among the top in the Utilities sector. At its current price of $34/share, PPL has a price to economic book value ( PEBV ) ratio of 0.7. This ratio implies that the market expects PPL’s NOPAT to permanently decline by 30%. This expectation seems unlikely considering PPL’s profit growth over the life of its business. If we assume that PPL can only grow NOPAT by 3% compounded annually for the next decade , which is well below the historical profit growth rate for PPL, the company is worth $51/share – a 50% upside. Dominion Resources (NYSE: D ) is one of our least favorite stocks held by Utilities ETFs and mutual funds. We’ve previously highlighted the unrealistic pension assumptions Dominion uses to boost earnings but that is not the only problem in the business. The company’s NOPAT has declined by 2% compounded annually since 2010. Over the same period, the company’s ROIC has fallen to 5% and Dominion earns a -11% free cash flow yield . Despite these poor fundamentals, D remains overvalued. To justify its current price of $70/share, Dominion must grow NOPAT by 6% compounded annually for the next 14 years . This expectation is rather optimistic given that Dominion has failed to grow profits at all over the past five years and that the company operates in a sector where profit growth rates are rarely that high for any sustained amount of time. Figures 3 and 4 show the rating landscape of all Utilities ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds (click to enlarge) Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, sector or theme.