Best And Worst ETFs (And Mutual Funds): Utilities Sector

The Utilities sector ranks eighth out of the ten sectors as detailed in my sector roadmap. It gets my Dangerous rating, which is based on aggregation of ratings of 9 ETFs and 39 mutual funds in the Utilities sector as of April 17, 2012.

Figure 1 ranks from best to worst the eight Utilities ETFs that meet our liquidity standards. Figure 2 shows the 5 best and worst-rated Utilities mutual funds.
 
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.
 
The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst, which allocate too much value to Neutral-or-worse-rated stocks.
 
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.
 
Figure 1: ETFs Ranked from Best to Worst

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

All nine Utilities ETFs earn my Dangerous rating. American Century Quantitative Equity Funds, Inc: Utilities Fund (BULIX) is my top-rated Utilities mutual fund and is the only Utilities sector fund to earn my Neutral rating.

First Trust Utilities AlphaDEX Fund (FXU)] is my worst-rated Utilities ETF and earns my Dangerous rating, along with all 8 other Utilities ETFs. Guggenheim Investments Utilities Fund (RYUTX) is my worst-rated Utilities mutual fund and earns my Very Dangerous rating.

Figure 3 shows that 10 out of the 150 stocks (over 6% of the total net assets) held by Utilities ETFs and mutual funds get an Attractive-or-better rating. However, none of the 9 Utilities ETFs and or the 39 Utilities mutual funds get an Attractive-or-better rating.

Figure 3 shows 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
 
Investors should not buy any Consumer Discretionary ETFs and mutual funds. Instead, they should focus on individual holdings.
 
For example, Public Service Electric & Gas Company (PEG) is one of my favorite stocks held by Utilities ETFs and mutual funds. It earns my Attractive rating. PEG is a rarity in the Utilities sector – 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 four of the last five years. Its current stock price (~$30.02) implies the company’s profits will permanently decline by 38%. The market is setting a low bar, and PEG has demonstrated that it can generate cash flows.
 
Integrys Energy Group, Inc (TEG) is one of my least favorite stocks held by Utilities ETFs and mutual funds. It earns my Very Dangerous rating. In a bad sector, TEG is among the worst. TEG has misleading earnings – its economic earnings are negative and declining while its reported accounting earnings are positive and increasing. The positive accounting earnings shouldn’t mislead diligent investors; TEG is a regular value destroyer, with negative economic earnings in all but one of the last 14 years. TEG’s current valuation (~$52.21) implies that the company will grow its profits by 11% annually over the next 10 years, which seems quite unlikely given the company’s history. TEG’s price is too high for the risk it presents.
 
87 stocks of the 3000+ I cover are classified as Utilities stocks, but due to style drift, Utilities ETFs and mutual funds hold 150 stocks.
 
Figures 4 and 5 show the rating landscape of all Utilities ETFs and mutual funds.
 
Our sector roadmap 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

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