There’s no shortage of index-tracking exchange-traded funds focused on utilities, which is why the folks behind the new actively managed Reaves Utilities ETF (UTES) believe they offer investors a distinctive product.
UTES, which launched Thursday, aims to outperform the passive pack by taking a qualitative and quantitative hands-on approach that management says can unlock value by navigating the balkanized state regulatory landscape that impacts the performance of public utilities.
“We’ve been following utilities for more than 50 years and have been managing money for 37 years, and all we’ve ever done is invest in utility companies and some of the industries that support them like energy companies,” says Jay Rhame, vice president, portfolio manager and research analyst at Reaves Asset Management in Jersey City, N.J.
Reaves, which was founded in 1961, offers separately managed accounts along with an open-end mutual fund, the Reaves Utilities and Energy Infrastructure Fund (RSRAX), and a closed-end fund, the Reaves Utility Income Fund (UTG).
Rhame says the closed-end fund and the new ETF have similar portfolios but different objectives––the former is focused on income and pays a monthly distribution, while the latter’s main objective is to have a higher total return than the S&P 500 Utilities Index, which is the benchmark for the Reaves ETF.
This is a tough time to launch a utilities-focused fund, as all of the roughly 20 utilities-related ETFs on the market have underperformed in a year when the equity markets in general are in the dumps. That’s because dividend-paying utilities, which are often seen as a safe-haven play against market turmoil, have been roiled over concerns that rising U.S. interest rates will lessen the appeal of their dividends as investors turn to fixed income for yield income.
Rhame acknowledges the headwinds, but posits that now is actually a good time to launch the Reaves Utilities ETF because the threat of higher rates “has dropped valuations to the point where we think utilities are an attractive investment right now,” he says.
As for the ETF’s potential yield, Rhame says it should be somewhere around 3 percent based on the opening price. “Obviously, we’ll have the exact number as we get closer to the dividend payment date,” he says.
The yield on the S&P 500 Utilities Index currently is in the upper reaches of the 3 percent range. “Given where we see opportunities in the industry right now, our portfolio should yield a little less than the index, but should grow a lot quicker,” Rhame says.
The Reaves ETF sports an expense ratio of 0.95 percent, which is much higher than expenses for the three largest utilities ETFs, in descending order: 0.15 percent at the Utilities Select Sector SPDR ETF (XLU); 0.12 percent at the Vanguard Utilities ETF (VPU) and 0.47 percent at the iShares Global Infrastructure (IGF).