S&P: Pass On Small-Cap Utilities ETFs

Before deciding to play defense by running into the boring low-beta world of utilities ETFs, investors might want to stick with the large-cap funds such as the Utilities Select Sector SPDR XLU, the Vanguard Utilities ETF VPU and the PowerShares Dynamic Utilities Portfolio PUI. The reason: Small-cap gas utilities face earnings pressure resulting from "exposure to natural gas prices through trading and marketing, exploration and production and natural gas storage," according to a research note published by S&P Capital IQ. As a result, S&P Capital IQ rates the PowerShares S&P SmallCap Utilities Portfolio PSCU Underweight. "Natural gas storage spreads represent the price at which gas is taken out of storage, usually in the winter months for higher prices, versus when the gas is put into storage, usually in the spring, summer and fall periods for lower prices. The warm temperatures this winter resulted in recent storage levels for natural gas reaching record levels, and in relatively low winter prices for natural gas. On top of this, gas utilities are likely to see much lower distribution volumes, and utilities with transmission pipelines are likely to see lower volumes as well, in our view," S&P said in the note. PSCU, which celebrated its second birthday earlier this month, was introduce as part of the PowerShares suite of sector ETFs designed to be small-cap equivalents of the Select Sector SPDRs. Since its April 2010 debut, PSCU has lagged the returns offered by XLU by about 1.1%. Home to 23 stocks, PSCU charges an expense ratio of 0.29% and has almost $44 million in assets under management. Piedmont Natural Gas PNY and Southwest Gas SWX combine for over 18% of the ETF's weight. Investors should also note eight telecom stocks combine for almost 15.6% of PSCU's weight. "PSCU garners an Overall ETF Ranking of Underweight from S&P Capital IQ. Some characteristics that lead to this ranking, in comparison to other ETFs analyzed by S&P Capital IQ Equity Research, include an unfavorable Performance Analytics category score driven by negative inputs for S&P Fair Value and S&P STARS; and a marketweight Risk Considerations category score, reflecting a negative input for S&P Credit Rating," S&P said in the note. PSCU is down about 4.4% year-to-date with almost all of that loss coming in the past eight weeks or so after the ETF failed to break resistance around $31.50. The fund now trades below its 50- and 200-day moving averages. PSCU features a dividend yield of 3.18%, which is about 70 basis points less than the yield offered by XLU.