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Summary Reaves Asset Management – a company with 50 years researching and investing in utility assets – recently launched the Reaves Utilities ETF. It joins the relatively small list of actively managed ETFs but carries an expense ratio that would place it among the most expensive in the utilities ETF space. The fund’s managers believe that actively managing the inherent complexities of the utilities sector can unlock additional value for shareholders that a passive index can not. Reaves Asset Management – an investment management firm that specializes in the utilities and energy sectors – has been investing on the behalf of its clients for the past 3+ decades. Recently, the company entered the ETF space for the first time with the Reaves Utilities ETF (NASDAQ: UTES ). Reaves, however, is not new to the fund game. It also offers the open-end mutual fund Reaves Utilities and Energy Infrastructure Fund (MUTF: RSRAX ) and the closed-end fund Reaves Utility Income Fund (NYSEMKT: UTG ). Not only is Reaves entering the ETF space for the first time but it’s doing so with one of the few actively managed ETFs out there. Manager The Reaves company has been around for over 50 years and has been managing investor money for around 37. The company now manages a total of roughly $3B in a combination of its mutual funds, ETF and separately managed accounts. The ETF is managed by Louis Cimino, John Bartlett and Jay Rhame. Bartlett has been with the company for 20 years, Cimino 18 and Rhame 10. The research team at Reaves, according to the fund’s fact sheet, “averages over 20 years of experience.” Investment Process The management team uses a combination quantitative and qualitative approach in order to make investment decisions and, according to the fact sheet , uses the following criteria. Where this product differs from most other ETFs is that it’s actively managed. Betting that the fund’s active management can outperform a passive index may prove to be a risky proposition. In most cases, actively managed funds cost more to operate to than passive index funds due to the extra involvement necessary to manage the fund. According to ETFDB.com, this ETF’s 0.95% expense ratio would rank it as the highest annual expense ratio among the roughly two dozen utility-focused ETFs in the marketplace. The Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) charges just 0.15% a year which means the Reaves ETF will need outperform by nearly a full percent per year just to come out ahead. That’ll be a tall order to fill regardless of who’s managing the fund. Holdings As of October 9, the fund has 21 holdings total. The top 10 holdings listed below account for 67% of fund assets currently. Prospects The ETF is debuting at a potentially advantageous time. Utilities as a whole have struggled this year – the Utilities Select Sector SDPR is down 4.8% year to date versus a 2.1% loss for the S&P 500. Investors had been anticipating a rate hike from the Fed and yields on the 10 year Treasury hit 2.5% earlier this year which made fixed income securities look more attractive and began rotating cash out of equities. As the prospect of a Fed rate hike looks to be getting pushed further out on the horizon and Treasury yields begin coming back down, the 3-4% yields offered by utilities began to look more and more attractive. While Reaves has been studying and managing utility assets for decades I still believe it’s going to have a difficult time overcoming the expense ratio over time. The fund currently has about $2.6M in assets and trades just a few hundred shares a day so bid-ask spreads could be large until the fund is able to operate a little more efficiently. All in all, due to the fund manager’s wealth of utility sector experience I would continue keeping an eye on this fund. Scalper1 News
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