The Lyxor UTI ETF (Utilities Europe) created in 08/2006 is listed in Euro on Euronext and seeks to replicate the STOXX600 Utilities Europe index composed of 27 European stocks of which approximately 24% are English, which implies a risk related to parity Euro - Pound Sterling that can be quite volatile in the Brexit period.
The costs of this ETF are 0.3% and the AUM approximately 32M €. Replication is indirect (via Swap) and there is a dividend capitalization policy.
Alternative ETFs: EXH9 (iShares in Euro), CU5 (Amundi in Euro)
Index & components
UTI replicates the wider European concessions / utilities sector, mainly with electricity producers and / or distributors, but also with water distributors and utilities (such as Veolia).
We note, however, that this index is composed of only 27 values, so it is quite narrow while only the three most important values (National Grid, Iberdrola and Enel) account for about 35% of all and gathering the five largest values by adding Engie and E.ON, we arrive at about 50% of the weight of the index. It also notes that English holdings represent 24% of the index which is not trivial in view of the potentially significant fluctuation of the £ against the Euro.
Market capitalizations are high and close to € 40bn for Iberdrola, Enel, National Grid and Engie, this is a factor of inertia and compensates for the relative narrowness of the index. In addition, the stocks that make up this index have defensive characteristics and generally offer high dividends, volatility is quite low in normal times. Note the importance of the return around 5% which reinforces the value side of the sector, however a number of stocks are highly indebted which can put their dividend at risk.
The fact that a number of companies are "in transition" with asset rotations and very large investment programs makes dividends riskier than before, undermining their usual defensive status. The good industrial results of major players such as Engie, Iberdrola and Enel, as well as spin offs (RWE and EON), nevertheless awaken the stock market interest for the sector. Large operators are still in a phase of optimizing portfolios, towards more gas and renewables, and less coal and nuclear, but the transition takes time.
The technological deflationary factor likely to delay the rate hike, is a favorable factor for utilities, generally heavily indebted, who take advantage of low rates to refinance themselves cheaply. In the long term, the reshaping of the portfolio and the optimization of the balance sheets are favorable elements. Most players are accelerating their transition with a portfolio that tends to focus more on gas and renewable energies (Engie, Iberdrola, Enel) whose marginal cost tends to fall, unlike nuclear power.
Latest developments
After a drop of -5.7% in 2016, a performance significantly lower than the Stoxx600 (+ 1.7%) the sector started up again in 2017 with a performance of + 10% (against + 10.6% for the Stoxx600NR), while in 2018 the Utilities Europe index held up better than the benchmark with a slight drop of -0.7% versus -5.2% for the stoxx600NR.
In recent weeks, the index is better oriented because of fears of global growth that puts cyclicals under high pressure and pushes investors to focus on defensive themes, while utilities offer a return of around 5 % without cyclical exposure. In addition, the rise in electricity prices pushed certain values (such as EDF) upwards with a ripple effect on the sector.
