By Kevin Grewal, Editorial Director at www.SmartStops.netNEW YORK ( TheStreet.com) -- As the energy sector remains attractive, many investors have rushed toward energy equities and energy ETFs, but the utility sector could be just as good of a play for various reasons. First, the vast majority of major utilities use coal and natural gas to generate power. In fact, electricity prices are calculated by using the price of coal and natural gas as a base and then adding additional charges based on the influences of supply and demand. Therefore, this makes the correlation between the energy and utility sectors high. Secondly, utilities have started to get over their biggest hurdle, government legislation on greenhouse gases, which has been known to drive up operational costs. In fact, a group of utility companies have come together and formed the American Businesses for Clean Energy. This group is pushing for clean energy initiatives and will benefit from new energy policies. Thirdly, many utility companies will benefit from President Barack Obama's new initiative to help fund an energy grid modernization. The Obama administration announced that it will distribute to some utilities, private companies and municipalities grants in the range of $400,000 to $200 million to build a smart energy grid. Many believe that once implemented, the new energy grid modernization will decrease consumer dependency on electricity, cutting into utility revenues. However, this will likely not take place for many years to come. Lastly, utility stocks are known to pay out high dividends, which could be a good thing to add to a portfolio, in the case of deflation. They are also known to have relatively low betas, which could help lower the risk levels of a portfolio.
Some well-diversified utility plays include the following:
- Vanguard Utilities ETF ( VPU), up 27% from a March low of $48.03 to close at $61.12 on Friday. iShares Dow Jones US Utilities Sector Index Fund ( IDU), up 31% from a $53.59 March low to close at $70.18 on Friday.