Goal: Compare European Utilities Index and US Utilities and determine which one is better for long-term investment.
Solution: Perform a comparison using utility indices specifically the iShares Dow Jones U.S. Utilities Sector Index Fund (IDU) ETF for US and Lyxor ETF DJ Stoxx 600 Utilities Fund for Europe. IDU is a proxy for U.S. Utilities Index and the Lyxor ETF is a proxy European Utilities. IDU is in US$ while the Lyxor Fund is in Euros.
Analysis:
IDU has 76 US stocks representing Electricity and Gas,Water & Multi-Utilities.Exelon Corp., an electricity utility is the top holding in the portfolio(about 10%). The fund was started in June 2000 and has a total net assets of $866+ Million.The dividend yield is 2.69% and the expense ratio is 0.48%
The Lyxor fund has 32 stocks with an asset base of about 63M EUR and the the expense ratio is 0.30%.Multi-utilities represent about 46%,Electricity at 37%,Gas at about 7% and Water at about 6% in the fund.The Reuters ticker for this fund in the Paris Exchange is LYXUTI.PA. The top 3 countries in the fund are Germany(27%), France(22%) and UK(20%).
The 5 year performance of the two funds are listed in the table below:
[TABLE=54]
We see that the European Utilities performance is better than their US counterparts in each year except in 2008 to-date. Excluding this year, the average annual return for the past 4 years for US utilities is 18.77% whereas the same for the European utilities is 26.01%. That’s a difference of over 7%.This is a big difference and kinda surprising since utilities in the US pay dividends quarterly and there is a lot more competition than Europe where companies pay dividends semi-annually and companies are regulated heavily.
The DJ Stoxx 600 Utilities index returns are as follows (in EUR):
YTD: -9.14%
3 Years: 64.78%
5 Years: 148.40%
Note: All data as of June 1, 2008
Sample European Utility Returns:
Enel:
From 01/02/2004 to 05/30/2008 Enel returned an annual yield of 14.81%.
This includes all splits and dividends reinvested.
Source: Enel Corp Site
EON:
A 1000 EUR invested in 01/02/2004 will be worth EUR 2,628.49 on 05/30/2008.That’s a growth of 162.85%.This includes all splits and dividends reinvested.
Source: EON Corp Site
Conclusion:
This simple analysis shows that European utilities are a better investment than US utilities.Of course the analysis has issues such as not taking into account currency exchanges and other factors.However any investor looking for above average returns with the utility sector might want to invest some in European utility stocks.
Components of DJ Stoxx 600 Utilities available as ADRs in the US are
as follows:
[TABLE=55]
Related Links:
1. Lyxor Utilities ETF Factsheet
2. iShares IDU page
3. DJ Stoxx 600 Utilities Index
4. ETF Connect – IDU Page
5. DJ Stoxx 600 Euro Utilities Components
