By Kevin Grewal
As the energy sector remains attractive, many investors have rushed towards energy equities and energy ETFs, but the utility sector could be just as a good of a play for various reasons.
First, the vast majority of major utilities use coal and natural gas to generate power. In fact, electricity prices are caluclated by using the price of coal and natural gas as a base and then adding addditional charges based on the influences of supply and demand forces; therefore, making the correlation between the energy and utility sectors high.
Secondly, utilities have started to get over their biggest hurdle, government legislation on greenhouse gases, which has been known to drive up operational costs. In fact, a group of utility companies have come together and formed the American Businesses for Clean Energy, which is pushing for clean energy initatives which will make then benefit from new energy policies.
Thirdly, many utility companies will benefit from President Barack Obama’s new initative to help fund an energy grid modernization. The Obama administration annouced that it will distribute to some utilities, private companies and municiapilites grants in the range of $400,000 to $200 million to build a smart energy grid. Many beleive that once implemented, the new energy grid modernization will decrease consumer dependancy on electricity, cutting into utility revenues, but this will likely not take place for many years to come.
Laslty, utility stocks are known to pay out high dividends, which could be a good thing to add to a portfolio in the case of deflation. They are also known to have realtively low betas, which could help lower the risk levels of a portfolio.
Some well diversified utility plays include the following:
- Vanguard Utilites ETF (VPU) up 27% from a March low of $48.03 to close at $61.12 on Friday.
- iShares Dow Jones US Utilities Sector Index Fund (IDU) up 31% from a $53.59 March low of to close at $70.18 on Friday.
When investing in equities it is important to keep in mind the inherent risks involved. To help mitigate these risks, implementing an exit strategy is of utmost importance. According to the latest data at www.SmartStops.net, an upward trend in the previously mentioned equities could come to an end at the following price points: VPU at $59.99 and IDU at $68.82. These price points change on a daily basis and updated data can be found at www.SmartStops.net