ETF Showdown: Turning The Lights On
It is not hyperbole to say that a large percentage of investors that have invested in a utilities ETF have either done so with U.S.-focused products such as the Utilities Select Sector SPDR (NYSE: XLU) or the Vanguard Utilities ETF (NYSE: VPU).
That has not been a bad idea. Over the past three years, a relevant time frame because utilities are long-term investments, XLU and VPU are up 42.8 percent and 44.5 percent, respectively, including dividends paid. Those returns have also been accrued with significantly lower volatility than global utilities ETFs.
Now might be the time to give global utilities funds a look with ETFs such as XLU trading at valuations that appear rich. Some analysts have noted international utilities ETFs are trading at noticeable discounts to U.S. rivals and their historical averages.
Two candidates to consider are the iShares S&P Global Utilities Index Fund (NYSE: JXI) and the WisdomTree Global ex-US Utilities Fund (NYSE: DBU). Making this ETF Showdown all the more compelling are some significant differences between the two ETFs. For starters, "global" as it applies to JXI means U.S.-based utilities loom large in this ETF. Those stocks account for over 51 percent of JXI's weight.
On the other hand, DBU excludes U.S. utilities altogether. All told, DBU offers exposure to 26 countries. Ten countries account for over 95 percent of JXI' weight. Country exposure leads to another noteworthy difference between the two. JXI's top eight country weights are developed markets. Investors have to scroll down to the ninth-largest country weight, Brazil at just 1.3 percent, to find emerging markets exposure in that ETF.
Conversely, emerging markets loom large in DBU. Brazil is that ETF's largest country concentration at 10.4 percent. Overall, 11 developing nations are represented in DBU and they combine for about 32 percent of the fund's weight.
The trade-off in opting for DBU's emerging markets exposure is predictable. Investors end up embracing a more volatile fund. Over the past three years, DBU's volatility has been 22.3 percent, 410 basis points higher than JXI's. Perhaps by virtue of the added emerging markets exposure, DBU is also slightly more expensive than its iShares rivals in terms of fees. DBU charges 0.58 percent per year while JXI charges 0.48 percent.
Income investors might want to consider paying up DBU, though. That ETF has a 30-day SEC yield of 4.59 percent compared to 3.82 percent for JXI. One reason for DBU's higher yield likely comes by way of its weight to Brazil. Brazilian utilities have traditionally been among the best dividend payers in South America's largest economy.
There is a rub, though. Yields on Brazilian utilities are seen as rising for all the wrong reasons. Share prices have been falling recently on news the government is looking to implement stricter price controls, according to MarketWatch.
JXI's has some strikes against, too. Namely valuation. The ETF's price-to-earnings ratio is almost 18, which is well above XLU's. So if XLU's looks sort of expensive, than JXI is quite expensive.
The bottom line here is DBU and JXI each have some pros and cons. A draw is in order in this showdown with a nod to DBU for those that embrace risk. Risk-averse investors looking for some global utilities exposure should prefer JXI.
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