UTI is an ETF that tracks the European concessions/utilities sector in a broad sense, including mainly electricity producers and distributors but also water distributors and utilities (such as Veolia).
We note, however, that this index is composed of only 30 stocks, so it is rather limited. The three largest stocks (National Grid, Iberdrola and Enel) count for about 37% of the total, and bringing together the five largest stocks (by adding Engie and SSE), represent 50% of the index weight. It should also be noted that English values account for 27% of the Index which is not benign In view of the potentially large fluctuations of £versus the Euro. Market capitalisations are high and are near €40bn for Iberdrola, Enel, National Grid and Engie. This is a significant inertia factor which offset partly the limited number of components of the Index. Moreover, the stocks that make up this index have defensive characteristics and typically offer high dividends. Their volatility is relatively low in normal times.
UTI bears reasonable costs of 0.3%, consistent with the average of European sectorial ETFs. It will be assumed that the Fund is relatively small to 48 M €, which make it rather diversification product. Replication of the Index is indirect (via a swap).
In 2016, the index performance was weak at -5.7%, far below the Stoxx600 (+1,7%). In 2017, the sector picked up and posted a + 13.4% YTD. Note the importance of Utilities yield , at around 5% which strengthens the value side of the sector, but some of these stocks are highly leveraged, which can put their dividend at risk. In the case of uti, the dividend is capitalised and therefore takes part in the performance. The fact that a number of companies are ‘in transition’ phase with accrued asset rotations and very large investment programmes make dividends more risky than before, which has ternished the defensive historical characteristics of the sector.
The strong industrial performance of large players such as Engie, Iberdrola or Enel appears to have boosted the sector in Q1 2017, particularly as spin-offs (RWE and EON) revived the stock market interest in the sector. Major players are still in a phase of portfolios reshaping, to including typically more gas and renewables, and less coal and nuclear, but the transition will take time. The drop in oil prices, a deflationary factor that would delay the rate hike cycle, is a favourable factor for utilities, generally highly leveraged, which benefit from low rates to refinance themselves. In the long run, portfolio rebalancing and balance sheet optimisation are supportive.
