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Utility ETFs and Stocks – Should You Buy, Sell, or Hold Utilities?

Although the S&P 500 has advanced 32% since the March 9 market bottom, the rally has been quite selective from a sector perspective. Groups decimated during the recent bear market have rallied the most. Financial shares are up big after losing 81% from September 30, 2007.

With investors demonstrating healthy risk appetite, defensive sectors have generally lagged. Utilities Select Sector SPDR (XLU), for example, is up just 15%.

Things have been worse for shares of individual utility companies like Consolidated Edison (ED), FirstEnergy (FE), Southern Company (SO), and Wisconsin Energy (WEC). These stocks trade fairly close to their 52-week lows. At current prices ED, FE, and SO shares carry plump dividend yields nearing 6% or more. WEC’s yield is lower at 3.7%.

SPDR XLU Utility ETFs Price Chart

Shares in the Utility sector have lagged the recovery. The Utilities Select Sector SPDR ETF (XLU) is up just 15% while the S&P 500 has advanced 32%.

So, why are Utilities out of favor?

Part of the reason is that the weak economy has quashed demand at most electric utilities. With the nation gripped in a recession, most state regulators are reluctant to grant healthy rate increases. Weak demand is offsetting benefits from lower fuel prices. As a result, reduction in 2009 earnings forecasts has been quite common among utilities.

Other reasons for underperformance include investors’ preference for more volatile stocks during a period when the stock market has been buoyant. In recent weeks, the up-tick in bond yields is also pressuring utility stocks.

So, should you buy, sell, or hold Utilities?

Selected utility stocks such as ED, FE, and SO are oversold and due for a short-term bounce. Nimble traders can look here to make a quick buck at relatively low risk. With earnings outlook less than stellar, intermediate and long-term investors will be better off looking elsewhere.


Must-read Articles on Sector Investing

Using Sector Funds to Construct Diversified Mutual Fund Portfolios

High-potential diversified portfolios can be constructed by dividing assets among a group of sector funds. This approach gives the investor flexibility to over-weight or under-weight certain sectors versus broadly diversified indexes. 'Sector funds are too risky.' 'I doubled my money with Fidelity Select Technology in 12 months!' 'Avoid sector funds.' If all of this sounds confusing, you are not alone.

Sector Mutual Funds: How to Pick Winning Sector Funds and Avoid Losers

If you are looking to earn great returns from the stock market sector mutual funds are right up your alley. Sophisticated investors recognize the potential sector mutual funds offer and know how to make such funds work for them. You can consistently beat the market by investing in the right sector mutual fund at the right time. In fact, you can make money even in bear markets.

Sector ETFs: Invest in the Best Sector ETF Consistently

Sector ETFs are among the most potent investment vehicles that allow individual investors to exploit advantages previously available only to large institutions. You can beat the market by investing in the right sector ETF at the right time. In fact, you can actually make money even when the overall market is tanking. However all too often, investors use sector ETFs inappropriately and get their fingers burnt.

New ETF and Mutual Fund Recommendations

ETF Mutual Fund RecommendationsThe Fidelity and ETF Core and Focus model portfolios have gained at annualized rates of 14.6% and 17.8%, respectively since 1994. The model portfolios will be repositioned with new mutual fund and ETF recommendations on Thursday, March 28. Learn more about AlphaProfit's Free and Premium Service investment newsletters.

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