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Airports, Toll Roads Make Good Alternatives to Utilities

Stocks in this article: XLU SPY ENZL EMIF

NEW YORK (TheStreet) -- A recent article in The Wall Street Journal discusses how some traders and investors see a coming "death spiral" for what was once considered a safe investment sector: utilities.

The biggest threat comes from solar energy as it becomes economically viable, the article says. But another issue is the sector's need to modernize its infrastructure.

If you agree with this thesis, you may want to look to airports such as Auckland International Airport (ACKDY) and toll roads such as Jiangsu Expressway (JEXYY) as interesting investment alternatives.

The Utilities Select Sector SPDR (XLU) is up only 7% this year, according to Google Finance. That compares with a whopping 28% gain for the SPDR S&P 500 (SPY).

The utilities sector also faces a huge threat from the bond market. Utilities, especially the regulated ones that tend to pay higher dividends, are sensitive to rising interest rates. When rates go up investors have tended to rotate out of utilities and into bonds because they can get higher yields without having to take on the risk and volatility of owning stocks.

I don't think solar energy poses an immediate threat to utilities, but it will eventually. The need to invest in infrastructure and rising rates are tangible threats to the sector.

The attributes of the utilities sector, namely lower volatility and higher yield, are important ingredients in a diversified equity portfolio, but if the sentiment summed up in the Journal article proves to be correct then investors will need to find stocks with these traits in other industries.

A couple of smaller segments that fit the bill include toll roads and airports. These are typically not built or operated by publicly traded companies in the U.S., but it is very common for operators in other countries to trade on exchanges. Some of these foreign companies also have American Depositary Receipts, which make it easy for U.S. investors to gain exposure to them.

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