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Why Utility ETFs are Gaining Despite Dull Q1 Earnings

The utility sector failed to impress in its first-quarter results with earnings barely in line with lowered estimates and revenues coming in lower than expectations. This is also true for some of the major players in the space like Duke Energy Corporation (DUK) and Dominion Resources Inc. (D). Although some companies like NextEra Energy (NEE) managed to beat on earnings and revenues, growth numbers were disappointing.
 
As per our Earnings Trend report, earnings of all the utility companies that have reported so far are down 5.1% year over year for the first quarter of 2016, with 42.9% of the companies beating the Zacks Consensus Estimate. Meanwhile, revenues are down nearly 9.1% for the quarter, with only 28.6% of them surpassing the consensus mark.
 
However, the slowdown in U.S. economic growth, Chinese market turbulence and volatile oil prices along with other factors resulted in a bearish environment, which led to demand for securities from sectors that provide a safer option. Thus, the utility sector, which is considered to be one of the defensive options when the market is exhibiting a high level of volatility, managed to remain in the green over last 10 days despite dull results (read: Market Turmoil Sends Utility ETFs to 52-Week Highs).
 
Below we have highlighted the quarterly results of the aforementioned utility companies in detail.
 
Duke Energy
 
Duke Energy reported adjusted earnings of $1.13 per share for the quarter that came in line with the Zacks Consensus Estimate. However, quarterly earnings decreased 8.9% year over year owing to milder winter weather, the absence of prior-year Midwest Generation results and higher winter storm costs. Total revenue was $5,622 million, lagging the Zacks Consensus Estimate of $6,059 million by 7.2%. The company maintained its 2016 earnings guidance in the range of $4.50 to $4.70 per share. Shares of the company were up 0.6% (as of May 6, 2016) since its earnings release.
 
NextEra Energy
 
NextEra Energy’s quarterly adjusted earnings of $1.55 per share beat the Zacks Consensus Estimate of $1.38 by 12.3%. Earnings climbed 10% year over year on the back of higher revenues from Florida Power & Light Company. Revenues of $3.8 billion were broadly in line with the Zacks Consensus Estimate and decreased 6.8% from the year-ago level. NextEra reiterated its earnings guidance of $5.85–$6.35 for 2016. Shares of the company went up 1.4% since its earnings release (as of May 6, 2016).
 
Dominion Resources
 
Dominion Resources’ quarterly earnings of 96 cents per share were in line with the Zacks Consensus Estimate. Earnings decreased 3% from 99 cents per share in the prior-year quarter due to mild weather conditions in its service territories and the absence of a farm out transaction. The company’s operating revenues of $2.9 billion missed the Zacks Consensus Estimate of $3.4 million by 14.3% and declined about 14.8% year over year.
 
Dominion expects to earn 65–75 cents per share for the second-quarter 2016 compared with 73 cents per share in the year-ago period. The company expects earnings for 2016 in the range of $3.60 to $4.00 per share. Shares of the company fell 0.1% since its earnings release (as of May 6, 2016).
 
ETFs in Focus
 
Mixed results notwithstanding, many utility stocks managed to hold up gains over the past 10 days, sending the related ETFs higher. This has put the spotlight on utility ETFs. Below we discuss four of these ETFs having a sizeable exposure to the above stocks, holding a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see all Utilities/Infrastructure ETFs here).
 
Utilities Select Sector SPDR (XLU)
 
XLU is one of the most popular products in the space with nearly $8.2 billion in AUM and average daily volume of roughly 15.8 million shares. The fund tracks the Utilities Select Sector Index and holds 31 stocks with NextEra Energy, Duke Energy and Dominion Resources among the top five spots with a combined exposure of nearly one-fourth of its total assets. Sector-wise, Electric Utilities (60.38%) dominates the fund followed by Multi-Utilities (33.64%). The fund charges 14 bps in investor fees per year. The ETF has posted gains of 3.2% in the past 10 days (read: 4 ETF Strategies that Deny "Sell in May and Go Away").
 
Vanguard Utilities ETF (VPU)
 
This ETF tracks the MSCI US Investable Market Utilities 25/50 Index. The fund holds 81 stocks in its basket. Duke Energy, NextEra Energy and Dominion Resources are among the top four stocks in the fund with a combined exposure of a little more than 20%. More than half of the fund’s assets are invested in Electric Utilities followed by Multi-Utilities (34.2%). The fund has amassed almost $2.2 billion in its asset base and trades in a moderate volume of 233,000 shares per day. The fund has a low expense ratio of 0.10%. The ETF has surged 3.2% in the last 10-day period.
 
iShares Dow Jones US Utilities (IDU)
 
The fund follows the Dow Jones U.S. Utilities Sector Index and holds 59 stocks in its basket. Duke Energy, NextEra Energy and Dominion Resources are placed among the top five stocks in the fund, together accounting for a share of approximately 21% of total assets. On a sectoral basis, Electric Utilities (57.6%) and Multi-Utilities (29.95%) hold the top two positions in the fund. The fund manages an asset base of around $1.0 billion and exchanges about 251,000 shares per day. It is a bit expensive with 45 bps in annual fees. IDU was up 3.15% over the last 10 days (read: Utility ETFs for Portfolio Stability and Income).
 
Fidelity MSCI Utilities ETF (FUTY)
 
This ETF tracks the MSCI USA IMI Utilities Index. The fund holds 81 stocks in its basket. Duke Energy, NextEra Energy and Dominion Resources are among the top four in the fund with a combined exposure of a little more than 20%. More than half of the fund’s assets are invested in Electric Utilities followed by Multi-Utilities (29.1%). The fund has amassed almost $239 million in its asset base and trades in a moderate volume of 135,000 shares per day. The fund has an expense ratio of 0.12%.FUTY was up 3.15% over the last 10 days.


 
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