iShares Dow Jones US Utilities (ETF) (IDU)

The rise of utilities ETFs in recent years should be primarily attributable to a decline in long-term bond yields. When compared, utility company’s dividend stream looks more attractive when treasury bonds pay less. Endorsing the same, utilities are poised to do well in the current environment characterized by stagnation, with investors looking for defensive plays and relative safety.

iShares Dow Jones US Utilities (IDU) owns and tracks the Dow Jones U.S. Utilities Index, which includes power, gas, water, and other utilities. With about 30% of its assets being tied up in top five holdings, this ETF keeps more than 74% of its money in electricity providers. Constituents have to be the leading U.S. companies including Duke Energy, Exelon Corp., Dominion Resources and Southern Company.

Given the current interest rate scenario, utility stocks envisage a positive operating environment ahead. Although utility shares have delivered modest returns quite sometime for now, the economic recovery in the U.S. should drive energy demand ever higher. Combined with very tight available supply and capacity, strong pricing across entire utility spectrum is being expected. The sector has been further encouraged by regulators’ move to focus on improved expenditure on infrastructure including transmission/distribution networks, as well as incentives to invest in nuclear plant construction, alternative energy projects, and clean-coal technologies.

Analyzing the past, the fund has given supernormal returns, with one return for 2006 being 20.70%. IDU succeeds at providing cheap and convenient exposure to large-cap utilities stocks. The fund has dropped its expense ratio from 0.60% to 0.48% in 2006, giving it an even larger expense advantage over its traditional peers. Conversely, the expense ratios for the Utilities Select Sector and Vanguard Utilities still are about 45% lower of what this fund's levy.

The weather has currently reversed in U.S., with cold temperature finally moving in. Endorsing the same, the utilities companies are cheering the arrival of true winter season, as energy demand across the country is eventually on a rise.