3 Utility Mutual Funds to Hedge Risk in a Volatile Market

Utility mutual funds are used as defensive instruments, which protect investments during a market downturn. The demand for essential services, such as those provided by utilities, is often shielded from market volatility. Utilities have a reputation for being stable investments that provide a regular dividend to shareholders, making them a popular long-term buy-and-hold option. Dividend yields on utility stocks are usually higher than those paid by other equities.

Aside from energy, which has seen a rapid rise during the supply-side crisis, utilities has been the only broad sector of the economy which has grown over the last year. As of September 2022, the Utilities Select Sector SPDR (XLU) jumped 5.5% in the last 12 months. Being defensive in nature, the sector has not been affected by the vagaries of a market downturn.

President Joe Biden, in a 2020 policy announcement, has set a target of achieving a 100% clean energy economy and net-zero greenhouse gas emissions by 2050, committing nearly $2 trillion in investment to achieve this goal. The utility industry has an opportunity to set right its long-overdue grid modernization and clean energy efforts by using the funds allocated in the Infrastructure Investment and Jobs Act, which includes $65 billion earmarked for upgrading the national power infrastructure. Investors can thus opt for utility mutual funds in an environment where the government of the day is looking to invest in the sector.

In summary, utility mutual funds provide much-required stability in a market that is expected to remain volatile for a while. Hence, astute investors should consider such funds at present. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

We have thus selected three utility mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive three-year and five-year annualized returns and minimum initial investments within $5000 as well as carry a low expense ratio. We have also made sure that at least 75% of the fund is invested in the utilities sector.

Fidelity Telecom and Utilities Fund FIUIX seeks high total return through current income generation and capital appreciation. FIUIX primarily invests in common stocks, with at least 80% of assets in securities of utility companies. The fund invests in domestic and foreign issuers. The fund offers dividends quarterly in March, June, September and December. Capital gains are offered twice a year, in March and December.

Douglas Simmons has been the lead manager of FIUIX since Sep 29, 2005, and 77% of the fund is currently invested in the utility sector. Three top holdings for FIUIX are 9.3% in Nextera Energy, 7.9% in Sempra Energy and 7.1% in Exelon.

FIUIX’s 3-year and 5-year annualized returns are 6.9% and 8%, respectively. Its net expense ratio is 0.60% compared to the category average of 0.94%. FIUIX has a Zacks Mutual Fund Rank #1. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Franklin Utilities Fund FRUAX seeks capital appreciation and current income by investing the majority of its net assets in the securities of public utilities companies, primarily in electric utility securities. FRUAX invests mostly in equity securities but may invest a small portion of its assets in debt securities. It offers dividends quarterly and capital gains, if any, annually.

John Kohli has been the lead manager of FRUAX since Dec 30, 1998, and 92.5% of the fund is currently invested in the utility sector. Three top holdings for FRUAX are 11.7% in Nextera Energy, 4.8% in CMS Energy and 4.6% in Dominion Energy.

FRUAX’s 3-year and 5-year annualized returns are 8.3% and 9.2%, respectively. Its net expense ratio is 0.58% compared to the category average of 0.94%. FRUAX has a Zacks Mutual Fund Rank #1.

PGIM Jennison Utility Fund PRUAX seeks high total return through capital appreciation and current income. PRUAX normally invests the majority of its investable assets in equity-related and investment-grade debt securities of utility companies. These include electric, gas, gas pipeline, telephone, telecommunications, water, cable, airport, seaport and toll road companies. Dividends are declared quarterly. Capital gains, if any, are paid annually.

Shaun Hong has been the lead manager of PRUAX since Sep 29, 2000, and 81.4% of the fund is currently invested in the utility sector. Three top holdings for PRUAX are 9% in Nextera Energy, 5.3% in CenterPoint Energy and 4.3% in Ameren.

PRUAX’s 3-year and 5-year annualized returns are 9.1% and 9.4%, respectively. Its net expense ratio is 0.82% compared to the category average of 0.94%. PRUAX has a Zacks Mutual Fund Rank #2.

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