Don't turn the lights out on utilities funds yet. After a tough 1999, stocks of companies that generate and distribute gas, electricity, water and telephone service are starting to look brighter. But mostly that's because just about everything else is looking so grim.

As evidence of a rebound, look no further than last Monday's launch of the

Rydex Utility

fund, a pure-play portfolio of what had been considered some of the biggest yawns of the stock market. The no-load Rydex fund plans to eschew the broader definition of utilities that has turned many funds in the category into closet telecommunications portfolios.

"We have 17 sector funds and we're trying to provide a pure play in each one," says Dan Gillespie, Rydex's head of sector funds, adding that he doesn't want the new utilities fund to overlap with the firm's existing telecommunications fund. On Thursday, more than $1.5 million in new investment flowed into the fund, which had just $750,000 in assets the previous day.

Already the Utility fund has been buying natural gas provider

Williams

(WMS) - Get Report

, electricity wholesaler

AES

(AES) - Get Report

and

Southern

(SO) - Get Report

, a regional electric utility.

It may turn out to be perfect timing for Rydex. Utilities, because of their traditionally high dividends, are used as a hedge against stock market volatility. In fact, they act more like bonds than stocks and tend to be sensitive to interest rates.

Thanks in large part to the recent technology rout, utilities funds are outperforming the average domestic equity mutual fund, 2.4% to 1.6%, according to

Morningstar

. That may not seem like a big gap, but consider that most investors had left these stocks for dead less than a year ago, believing they didn't have a place in the New Economy.

Utility stocks have risen noticeably in the last few weeks, though nothing has fundamentally changed in the sector. Mainly they're getting a boost as investors run away from high tech and look to take some solace in the familiar. But observers point out that there was nothing wrong with utilities over the past year to make investors shun the sector.

"We needed some fear in the market for utility stocks to do well," says Mark Luftig, manager of the

(SAMUX)

Strong American Utilities fund. "But nothing has changed for utilities."

Whether utilities can continue to look good outside a

Nasdaq

swoon remains to be seen. Deregulation continues to cause uncertainty about which providers will be left standing in a world of competition. Observers liken the situation to deregulation in the telephone industry in the early 1980s.

So far, though, it has produced some early frontrunners, such as

Duke Energy

(DUK) - Get Report

, a North Carolina power provider that has a dominant position in the state, and

Dominion Resources

(D) - Get Report

, which has a similarly strong position in Virginia.

But not all utilities funds have as much of this stable Old Economy stuff as you'd guess from their names. Most have a healthy helping of telecommunications companies. While the market rewarded that strategy last year and gave the funds that owned them a boost, in the last few weeks, it's been a drag on performance.

"Some funds have been doing it for many years to goose up their returns," says Luftig. The average utility fund has just a 44.6% weighting in classic utilities stocks, according to Morningstar, though the total is somewhat understated because it doesn't include telephone company stocks, which are classified as part of the services sector. The services sector, which also includes telecom stocks, accounts for an average of 41.4% of utilities funds' portfolios.

If funds have been loading up on telecom it's because investors expect wild returns, says Mark Finn, chief investment officer of the

Lindner

funds. They're not satisfied with the traditionally stable but puny returns traditional, dividend-paying utilities are famous for.

In the past year, the

(LDUTX)

Lindner Utility fund moved away from those holdings because Finn says he didn't see much promise there. At the same time, the firm made a deliberate move into telecommunications with a 14% allocation. Through appreciation, that amount grew to about 40% by the end of the year.

It wasn't just the hot returns in telecommunications that swayed Lindner from old-style utilities, Finn says. Deregulation made those staid avatars of the past less of a safe bet than they were. And fewer companies are paying the prized dividends they once did. Twenty years ago about two-thirds of utilities increased their dividends. Today only about a third consistently do so. "Many companies have chosen to buy back stock instead of increasing the dividend yield," Finn says.

Utilities have generally been defined as companies that produce and deliver water, electricity, gas and telephone service. It's the last type of company that's tricky.

AT&T

(T) - Get Report

and the Baby Bells certainly provide conventional telephone service. But they're also in wireless communication and have an Internet presence.

Some funds stretch the definition even further. The

(FIUIX) - Get Report

Fidelity Utilities fund has just 17% in the gas, water and electricity providers. The rest is in telephone companies. Of the fund's top 10 names, eight do double duty in the

(FSTCX) - Get Report

Fidelity Select Telecommunications fund.

(AUTLX)

Aim's Global Utilities fund has a 19% investment in technology, more than any other fund in the group. Among its holdings are

Nokia

(NOK) - Get Report

,

Lucent

(LU)

and

Clarent

(CLRN)

.

To be fair, prospectuses do tell shareholders that their funds may veer outside traditional utilities. That just goes to show it isn't a good idea to build a portfolio based only on a fund's name.

The prospectus of Lindner's Utilities fund says it can move up to 65% of its assets into telecom.

That's a natural choice, say some utilities fund managers. "We define utilities as essential services," says Joe Sterling of the

(BULIX) - Get Report

American Century Utilities fund. "Everybody needs water, power and communications to live in the 21st century."

The shift away from the stable dividend-producing stocks irks utility stalwarts like Strong's Luftig. "When you're getting into stocks like

Nextel

(NXTL)

and

Qualcomm

(QCOM) - Get Report

, then I think you're abusing the term utility fund," he says.