Opinions
Mike Philbrick
iShares S&P/TSX Cap. Utilities
XUT-T
COMMENT
Mar 25, 2020
Stock price when the opinion was issued
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An ETF for utilities. A great defensive sector with amazing performance lately. XUT-T is good, but 60% is in the top 4 holdings (inculding Fortis and Algonquin); 4% yield and 55 basis point cost. ZUT-T is more diversified and equal-weight. ZWU is also equal weight but does covered calls to create extra income, which sells future income for gains today; yields 6%. Given the strong performance of utilities in the past year, covered calls have lagged.
Utilities are a very low-volatility sector, so the premiums are lower compared to oil/gas. He suggests holding both this and ZWU-T. Utilities are a top sector, because valuations are so reasonable (hard to find that in this market). ZWU will give you covered calls, but XUT will give you upside. So, own both, half and half.
Utility index holding about 15 names including FTS, EMA, and H. Very defensive, low beta (about half that of the TSX). Not a bad place to be for the income-focused investor looking for stability. Longer term, if interest rates move higher, then valuations and prices will come down. Risks for utilities include regulatory decisions and capex overruns.
Not a sector he likes or holds right now. This ETF (38%) has underperformed the TSX (95%) over last 5 years. Yield is ~3.9%.
XEI has a fair exposure to the overall business cycle with broad based holdings. You want to focus on areas of the market that have less impact from issues in the financial markets. He would opt more for a utility ETF (XUT) that is more of a regulated sector with a agreed return on capital and more likely to be sustained.