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Fuel Prices, Falling Rates Boost Utility Funds

Mild weather, ample supplies of natural gas and a correction in crude oil prices gave utility funds a boost this past week.

These funds, which hold stocks, preferred stocks and bonds of utility companies, and also benefitted from expectations that the Fed could cut rates again.

Falling interest rates tend to boost prices of securities that pay fixed rates of return, by making their rates appear relatively more attractive.

Excluding the funds shorting the sector, the average utility fund tracked by Ratings rose 2.23% in the five trading days following the Thanksgiving holiday.

While this return trailed the 3.79% for the S&P 500 and the 4.07% for the Dow Jones Industrial Average, it was a good week for utility funds.

The best performing fund this week is the (ERH) Evergreen Utilities and High Income Fund (ERH), a closed-end fund, which returned 8.07%. As of Aug. 31, shares of Mirant (MIR) accounted for 62.5% of assets.

The stock climbed 5.41% this week, benefitting from the expected commencement of a $1 billion share repurchase program.

The buyback is part of a plan to distribute $4.6 billion in excess cash that was announced Nov. 9.

Four of the top 10 performers target water utilities. The PowerShares Global Water Portfolio (PIO) was the best of the quartet, returning 6.92%.

The fund's second largest holding, Singapore's Hyflux Ltd, jumped 16.15% on a steady pipeline of Chinese water projects and plans to raise $162 million to continue the company's expansion in China, India, the Middle East and North Africa.

The third-place fund, (MFD) Macquarie/First Trust Global Infra/Util Div & Inc (MFD), added 6.92%.

The fund's two best-performing holdings, Severn Trent PLC, up 7.95%, and Pennon Group PLC, up 6.17%, both reported higher first half of 2007 earnings citing the ability to raise prices for water and sewage services in Britain.

The (GLU) Gabelli Global Utility & Income Trust (GLU) also had a standout week as its holding of Biffa PLC, a U.K. trash collector, skyrocketed 22.46% on a second private-equity buyout offer after the first was rejected.

Another holding, Millicom International Cellular SA (MICC), rose 15.96% amid hopes the company can gain market share in both Latin America and Africa.

The worst performing utility fund this week is the UltraShort Utilities ProShares (SDP). This ETF slipped 2.69% while tracking the daily returns of twice the opposite performance of the Dow Jones U.S. Utilities Index. (The positive version of this negatively leveraged fund is the Ultra Utilities ProShares (UPW). It returned 3.03% for the period, just missing the cutoff for the top 10 best performers.)

The member of the Dow Jones U.S. Utilities Index having the best week was NRG Energy (NRG). The company's shares rose 7.76% for the five trading days ended Thursday, in advance of the big news that the Nuclear Regulatory Commission accepted its application to build two nuclear power plants as part of the company's South Texas Project in Bay City, Texas.

Construction of the two new plants will take approximately five years, beginning in 2010, following design work of General Electric (GE). The Nuclear Regulatory Commission expects to review at least 32 more reactor applications over the next two years.

Best Performing Utility Funds
Ranked by returns for the week ended Nov. 29
Fund Ticker Rating Fund Type One-Week Total Return
Evergreen Utilities and High Income Fund ERH B Closed-End 8.07%
PowerShares Global Water Portfolio PIO U ETF 6.92%
Macquarie/First Trust Global Infra/Util Div & Inc MFD B+ Closed-End 6.41%
Gabelli Global Utility & Income Trust GLU C+ Closed-End 5.63%
PowerShares Water Resources Portfolio PHO B ETF 3.82%
Claymore S&P Global Water Index ETF/USA CGW U ETF 3.70%
RiverSource Dividend Opportunity Fund INUTX B Open-End 3.44%
First Trust ISE Water Index Fund FIW U ETF 3.35%
First Investors Value Fund FIUTX D Open-End 3.32%
Gabelli Utility Trust GUT C Closed-End 3.31%
Source: Bloomberg

Read here for an explanation of our ratings.

Worst-Performing Utility Funds
Ranked by returns for the week ended Nov. 29
Fund Ticker Rating Fund Type One-Week Total Return
UltraShort Utilities ProShares SDP U ETF -2.69%
DNP Select Income Fund Inc DNP C- Closed-End -0.33%
Rydex S&P Equal Weight Utilities ETF RYU U ETF -0.10%
First Trust Utilities AlphaDEX Fund FXU U ETF 1.12%
iShares DJ US Utilities Sector Index Fund IDU B ETF 1.14%
Utilities Select Sector SPDR Fund XLU B+ ETF 1.17%
Reaves Select Research Fund RSRFX U Open-End 1.19%
FBR Gas Utility Index Fund GASFX B+ Open-End 1.21%
DTF Tax-Free Income Inc DTF D Closed-End 1.26%
Utilities HOLDRs Trust UTH B+ ETF 1.31%
Source: Bloomberg

Breaking the nuclear regulatory logjam is an important step in the United States' efforts to head towards energy independence. Without cheaper sources of energy, we may get to the point where mandates for energy conservation become unnecessarily harsh. A University of Alberta study showed 30% of Canadian households have "beer fridges". It bemoaned that these secondary refrigerators may be less efficient than newer models. In my opinion, attacking a guy's right to a "beer fridge" is going too far.

Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

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