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Investing in utilities stocks
This heavily regulated sector is fairly low risk — but growth is limited.
Utilities stocks offer some of the most stable and reliable investment opportunities on the market. But government regulation may limit revenue and growth potential.
What are utilities stocks?
Utilities stocks belong to companies within the utilities sector of the stock market. According to the Global Industry Classification Standard, there are 11 stock market sectors, each defined by a specific industry or type of business. Stock sectors help investors gauge or invest in select pieces of the market.
The utilities sector is comprised of companies responsible for basic public services and amenities, including water, gas and electricity. As a result of the public-facing nature of the sector, it’s one of the most heavily regulated, contributing to stable dividends and decreased volatility.
What subcategories does it include?
Companies within the utilities sector can be publicly or privately owned and break down into the following subindustries:
- Electric. Companies that create or provide electricity for commercial and residential homes belong to this subindustry.
- Gas. Unlike companies that produce gas from the energy sector, gas utilities distribute manufactured and natural gas to businesses and households.
- Water. Companies are responsible for buying and distributing water, including water treatment facilities.
- Multiutility. These companies provide more than one utility, combining gas, water, electricity or other services in their public offerings.
- Renewable energy. Independent power producers and renewable electricity providers fall into this category, including solar, wind, geothermal and hydropower energy providers.
How to invest in the utilities sector
While it’s not possible to directly invest in a stock sector, you can invest in what the sector tracks by purchasing stocks and exchange-traded funds (ETFs).
Individual stocks let investors target the specific companies they want to back. Stocks can offer high-yield returns, but tend to be more volatile than ETFs.
ETFs track the entire sector and offer more comprehensive portfolio exposure. But they come with expense ratios — typically in the 0.03% to 2.5% range.
To purchase stocks or ETFs, you’ll need a brokerage account. Here’s a quick breakdown of the investment process:
- Pick a platform. Explore your platform options to find the broker best suited to your investment goals.
- Open an account. Complete applications for web-based brokerages online with just a few pieces of personal information.
- Fund your account. Transfer money to your new brokerage account to begin trading.
- Select your securities. Use your platform’s research tools or rely on third-party research to find stocks and funds by sector.
- Watch your investments. Log into your brokerage account to monitor your investments.
What stocks are in the utilities sector?
The list below shows some of the utilities stocks Canadian investors can buy into on either Canadian or US exchanges. If you’re interested in a specific company, take some time to carefully research it — including its history and financials — before you buy in.
- Fortis Inc. (TSX: FTS)
- Algonquin Power & Utilities Corp. (TSX: AQN)
- Polaris Infrastructure Inc. (TSX: PIF)
- Hydro One Limited (TSX: H)
- Brookfield Renewable Partners L.P. (TSX: BEP.UN)(NYSE: BIP)
- Emera Incorporated (TSX: EMA)
- TransAlta Renewables Inc. (TSX: RNW)
- ATCO Ltd. (TSX: ACO.X)
- Northland Power Inc. (TSX: NPI)
- Canadian Utilities Limited (TSX: CU)
- AltaGas Ltd. (TSX: ALA)
- American Water Works Company, Inc. (NYSE: AWK)
- NextEra Energy, Inc. (NYSE: NEE)
- Duke Energy Corporation (NYSE: DUK)
- ENGIE SA (OTC Markets, Pink Sheets: ENGIY)
- Dominion Energy, Inc. (NYSE: D)
What ETFs track the utilities sector?
You can invest in utilities ETFs from Canada, but if you’re looking for more options, you can also explore ETFs that trade on stock exchanges in other countries like the NYSE in the US. There are several Canadian-based brokerages that offer access to international exchanges on which utilities ETFs trade including Interactive Brokers and Questrade.
Major utilities-tracking ETFs include:
- BMO Equal Weight Utilities Index ETF (TSX: ZUT)
- CI First Asset Active Utility & Infrastructure ETF Common Units (TSX: FAI)
- BMO Covered Call Utilities ETF (TSX: ZWU)
- Harvest Equal Weight Global Utilities Income ETF (TSX: HUTL)
- First Trust AlphaDEX U.S. Utilities Sector Index ETF (TSX: FHU)
- iShares S&P/TSX Capped Utilities Index ETF (TSX: XUT)
- SPDR S&P International Dividend ETF (NYSEARCA: DWX)
- Fidelity MSCI Utilities Index ETF (NYSEARCA: FUTY)
- First Trust EIP Carbon Impact ETF (NYSEARCA: ECLN)
- First Trust Utilities AlphaDEX Fund (NYSEARCA: FXU)
- Invesco S&P 500 Equal Weight Utilities ETF (NYSEARCA: RYU)
- iShares Global Utilities ETF (NYSEARCA: JXI)
- iShares U.S. Utilities ETF (NYSEARCA: IDU)
- John Hancock Multi-Factor Utilities ETF (NYSEARCA: JHMU)
- Reaves Utilities ETF (NYSEARCA: UTES)
- Utilities Select Sector SPDR Fund (NYSEARCA: XLU)
- Vanguard Utilities ETF (NYSEARCA: VPU)
- Global X MSCI China Utilities ETF (NYSEARCA: CHIU)
How is the utilities sector performing?
The graph below tracks the Utilities Select Sector SPDR Fund ETF (XLU) in the US. Tracking ETF performance is one way to gauge how a sector is performing.
Why invest in the utilities sector?
One of the major draws to the utilities sector is stability. Companies in this sector typically pay steady dividends investors can rely on. The utilities sector is one of the least volatile on the market and is especially well-positioned to weather recession. Gas, water and electric companies tend to do well during economic downturn, so stocks in this sector are a prudent choice for investors executing a long-term buy and hold strategy.
What unique risks does the utilities sector face?
Due to the government regulations that hold significant sway over this sector, it’s difficult for utilities providers to increase their revenue through raised rates. And due to the sizable infrastructure required to operate, utilities providers are often forced to carry a lot of debt, making them especially vulnerable to interest rate fluctuations.
Profits from investing in the utilities sector can act as a reliable source of income, but investors seeking opportunities with greater growth potential would do better to explore other sectors, like technology stocks.
Compare stock trading platforms
In order to purchase stocks or ETFs, you’ll need a brokerage account. Compare your potions using the table below to find the right fit.
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Bottom line
The utilities sector houses companies responsible for basic services we need and rely on, including gas, water and electricity. Reliance on these staple services makes companies in this sector a safe and stable investment, but heavy regulations limit their revenue potential.
Review your brokerage account options across multiple trading platforms for the account best suited to your investment goals.
Frequently asked questions
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
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