Consider these factors and more to profit from holding the best Canadian utility ETF in your diversified portfolio

Utility stocks are shares in companies that provide electric power, telecommunications, pipeline services and so on.

Here are some key characteristics to help you find the best Canadian utility ETF for your portfolio:

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Understand sector weightings and volatility to limit your exposure to risk

Speaking very generally, stocks in the Resources & commodities sector and the Manufacturing & industry sectors are apt to expose you to above-average volatility, while those in the Finance and Utilities sectors involve below-average volatility.

Company profits in Canadian Finance and Utilities tend to be more stable over the long term than the profits of Resources or Manufacturing companies. Consumer-sector stocks are apt to fall in the middle, between the highly volatile Resources and Manufacturing companies and the more stable Finance and Utilities companies.

The proper proportions of how much you should hold in these sectors depends on your temperament and circumstances.

For example, conservative or income-seeking investors may want to emphasize utilities and Canadian banks in their portfolio diversification, because of these stocks’ high and generally secure dividends.

More aggressive investors might want to increase their portfolio weightings in Resources or Manufacturing stocks.

However, you’ll want to diversify within the Resource segment as well. That means not holding just, say, oil and gas stocks, but also metals and other Resources stocks as well for exposure to a number of areas.

Discover the characteristics of the best Canadian utility ETF investments so you boost your gains

The best utility ETFs can deliver predictable, lower-risk dividends. While most utility stocks they hold are steady income producers, some utilities also offer opportunities for growth. This happens mostly when utilities want to expand into new markets or geographic regions.

When looking for investments in the utility sector, investors should avoid judging a company (or the ETF holding that company) based solely on its dividend yield. That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a company’s dividend yield could be high simply due to its share price having dropped sharply (because you use a company’s share price to calculate yield). That low price can be a sign of an imminent dividend cut.

Apart from a good dividend yield, the utility stocks you invest in should have a long history of paying (and raising) their dividends. For a true measure of stability, focus on those companies that have maintained or raised their dividends during economic and stock-market downturns.

Utilities typically have a lot of debt as part of their capital structure, and higher rates could make it more expensive to raise money and refinance existing debt. As well, their shares, which typically offer high yields, compete with fixed-income instruments for investor interest.

However, higher interest rates are usually accompanied by increased economic activity and growth. That stronger economic activity is good for utilities: It pushes up demand for their power and so on and at the same time boosts the electricity rates they charge their customers.

Use these tips to find the best ETFs for your portfolio—including the best Canadian utility ETFs

1. Know how broad the ETF’s holding are, as this can help determine its volatility. The more stocks it holds and the more it’s diversified, the less volatility it may have. A sector-based ETF like one that tracks resource stocks is likely more volatile.
2. Know the economic stability of countries they invest in when buying international ETFs. It’s also good to mention that foreign leaders may not be your ally when it comes to passing legislation that can affect your investments.
3. Know the liquidity of ETFs you invest in—how many units a day it trades on average.
4. Consider buying ETFs in a lump sum rather than in periodic small amounts to cut down on brokerage fees.

Add the best Canadian utility ETF and other high-quality stocks or ETFs to your diversified portfolio with the help of our three-part Successful Investor approach

• Invest mainly in high-quality stocks (or ETFs that hold those stocks), so a majority of your stocks will pay off for you eventually.
• Diversify among most if not all of the five main sectors. That way, you avoid the risk of investing heavily in any one group or sector that is headed for a particularly big decline (like, say, a Resources slump).
• Downplay or avoid stocks (or ETFs that hold their stocks) in the broker/media limelight. That helps you avoid losses that come from buying “market favourites” that are about to lose favour with investors and drop out of the limelight.

What sectors do you focus on the most in your ETF investing?

How do you limit your risk in utility investing?