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Utilities ETFs
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About Utilities ETFs |
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Utilities ETFs Overview and forecast
The utilities sector isn't generally considered a bundle of excitement for investors. It's a pretty staid and stable part of the market. So the nine months between mid 2008 and the first quarter of 2009 were more than a slight shock for the investment funds.
The Utilities ETFs, in some cases, were showing very low volumes of trade. The start of the nine month period saw heavy trade, variable depending on which of the Utilities ETFs was involved, but an interesting trading pattern by any standards. Some had large isolated spikes, others were busy traders.
The Utilities ETFs, however, followed the market's ungraceful nosedive from a great height. The prices went into jagged downward mode, bottoming in early March 2009, and making a slightly enthusiastic, if hardly impressive in relation to the drop, upward move during that month.
Not that the Utilities ETFs have been inactive themselves. A browse through the holdings of the Utilities ETFs shows that they've been diversifying outside the black hole of the US economy. That apparently hasn't impressed the market, but in principle, that level of diversification is actually a proper hedging approach in times when asset values are under pressure.
Short term (6 months)
It is unlikely that the Utilities ETFs will perform any better than the market, in this period. The market is trudging uphill, and the demand for utilities and services is sluggish at best. The companies themselves are also being wary and conservative, and the sector doesn't look like doing anything innovative or new until the basic core business stabilizes.
Nor could they. Utilities are solid investments, when their client base is solid. In a bull market, with strong industrials and consumer spending, they're strong performers. The exact opposite of those conditions apply at the moment, and unless some initiative outside the normal paradigm happens, they'll be slow movers. As trading propositions, some of the Utilities ETFs are performing better, but only a few are really widely traded in the sense of large volumes. Their margins tend to suit high volume trading, which again tends only to favor a few of the Utilities ETFs.
Medium term (2 years)
The utilities sector couldn't be called melodramatic. Quite the opposite, it's sometimes accused of being regressive and hidebound. That situation, however, is now changing, as new technology and new industrial concepts are effectively phasing out the old infrastructure. Things like green energy are inevitably changing the face of the retail and industrial utilities, and more importantly, affecting their price structures. The old style utilities are living on borrowed time, even if they'll be around for a decade or so yet.
In the medium term, some indicators of change will inevitably affect the sector. The Utilities ETFs are actually quite well placed to position themselves to deal with this quiet, but unstoppable revolution. It's also possible that some of the utilities corporations will break the standard molds of their industries, and adopt new strategies, perhaps even create new super utilities, to make themselves more competitive, and to annex market shares.
Long term (5 years)
For some corporations and mindsets in this sector, 5 years isn't quite long enough to be considered "long term", but for investors hoping to make money, it would be quite long enough, perhaps too long. The sector will start to fragment into New Economy and Old Economy dichotomies. The Old Economy utilities will follow the dinosaurs. There is simply no place left in the markets for the old Industrial Revolution models any more.
Investors will be perhaps unsurprised to hear that there's a view among many commentators that the utilities sector is its own worst enemy, historically. Rationalization of the utilities is a common topic. Some people feel the market is overburdened with weak, underperforming corporations, and that they are fighting on their margins. In five years, the utilities sector can be expected to be on the receiving end of progressively tougher demands from the market. The investment market will be increasingly intolerant of the dinosaur approach to utility upgrades. That means that the Utilities ETFs will also be under pressure, depending on the holdings.
Qualifiers for projections
That view, unfortunately for investors, isn't entirely unjustified. The demand will be, understandably, for good performance, not mere cosmetic "figure herding", and "good numbers". In terms of the technology and industrial requirements of this coming century, the old utilities are not going to be great performers. They have to modernize, or die. If they die while listed, they could take a lot of investor capital with them.
They could in fact be poison pills, as holdings. They could also be major liabilities, carrying around a lot of obsolete technology, debt, and scaring off investors. Investors in this sector are strongly advised to keep an eye on the holdings of the Utilities ETFs. These are large companies, with major capital investments and the assets of the Utilities ETFs will naturally be affected by any big issues related to them.
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Last Updated on: 2010-01-14 02:03:40 |
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