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Dear Mr. Berko:

Dear C.C.:

An exchange-traded fund (ETF), like a traditional mutual fund, is an investment company that pools investors’ money using professional managers to invest in specific objective sectors like oil stocks, foreign stocks, income or growth stocks, etc. Unlike a mutual fund, ETFs issue only a fixed number of shares and trade on the New York or American stock exchanges. Therefore, ETF shares are bought and sold like common stock.

I like ETFs because they’re less volatile than the individual issues, and their diversified portfolios can provide safer capital gains potential than an individual common stock. There are ETFs for every season and every reason. Some own municipal bonds; some own corporate bonds; some own preferred stock, mid-cap stocks, small-cap stocks or large-cap stocks. Other ETFs own emerging market stocks, real estate investment trust issues, oil shares, natural gas or utility stocks. And in the main, their expense ratios are often half of those of traditional mutual funds.

Here are three utility ETFs that you may wish to consider.

Utilities Select Sector (XLU – $28.68), the portfolio of which includes electric utility, multi-utility, energy trading, independent power production and gas utility stocks. Exelon, Southern and FPL Group are the largest holdings among the 31 stocks in its portfolio. In the past five years, XLU has returned 18.6 percent, and the current dividend yields a sweet 4.31 percent.

Then there’s iShares Dow Jones U.S. Utilities (IDU – $69.07), which tracks the Dow Jones utility index and includes electricity, gas, water and multi-utilities issues. Exelon, Southern and Dominion Resources are IDU’s top holdings. In the past five years, this ETF has returned 18 percent, and the dividend yields 3.87 percent.

Finally, there’s a slightly different model called Utilities Holders Trust (UTH – $91.56), which trades like an ETF but behaves a bit differently. UTH is a trust and not a registered investment company like IDU or XLU. This means that the stocks in its portfolio never change except for mergers, acquisitions or spinoffs. If an issue is spun off, the shareholder receives his share of that utility in his brokerage account. There are 18 utility stocks in the UTH portfolio, including Southern, Exelon and Entergy. During the past five years, UTH has returned 14.5 percent, and its dividend yields about 3 percent.

A single utility issue that has the Street’s favor is Edison International (EIX – $31.94), which is on track, according to Value Line, to be a $50 or $60 stock in the coming five years. Its diverse business model should, in the next five years, increase revenues by 22 percent to $17.2 billion, help earnings grow 36 percent to $4.25 a share and improve the dividend to $1.50.

I’d consider covering all the bases and split your $16,000 evenly among EIX common, XLU, IDU and UTC.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service