Modest Gains For Utilities
What about active sector ETFs that aren't trying to reinvent the wheel? Do they still outperform?
The Reaves Utilities ETF (UTES) is about as pure-play an active sector ETF as they come It just tracks utilities, utilities, utilities. Reaves Asset Management boasts more than 50 years of tracking the utilities sector, and as such, there are few gimmicks to UTES' portfolio—just stock picks backed by decades of experience.
That said, UTES' short-term performance doesn't exactly bowl you over. Over a one-year period, the fund has improved just 2% on our sector benchmark, the Thomson Reuters US Utilities Index. That's not much, especially after UTES' 95 bps fee.
But it's the long game that matters, says Tom Grimes, head of institutional sales for Reaves Asset Management. "The daily returns of our fund versus the S&P 500 Utilities Index are very highly correlated: 98 to 99%. Over time, however, by adding a few outperformers here and avoiding losing names, we manage to outperform."
To that point, UTES forgoes some big utilities, like Duke Energy and Dominion Energy, while including regional players like Atmos Energy and Portland General Electric. It doesn't look a lot like the market indexes that underpin competitors like the Utilities Select Sector SPDR Fund (XLU) or the Vanguard Utilities ETF (VPU), but it hasn't left those ETFs in the dust, either.
Weirdness Pays Off
A pattern appears to be emerging: The active sector ETFs that outperform are the ones that actually defy their sector classification, like EMLP or ARKQ. Those that stick closer to traditional sector definitions—UTES, AMZA, ARKG—also more closely resemble market performance.
Active management finds its niche, it seems, in the spaces between sectors—where traditional definitions fall apart and things get a little weird. There's great opportunity in weirdness, but great risk as well.
As usual, know your limits.