Some ETF Ideas for the Exelon/Pepco Takeover

The utilities sector, already the top performer in the S&P 500 this year by a wide margin, could get another boost when U.S. markets open Wednesday thanks to some mergers and acquisitions news.

On Tuesday night, Bloomberg reported that Exelon (EXC), the largest U.S. nuclear power provider and a top-10 holding in several of the largest utilities exchange traded funds, has agreed to purchase Pepco Holdings (POM) for $5.4 billion in cash.

Exelon, which has operations in Baltimore and Philadelphia, will broaden its Mid-Atlantic presence with the purchase.

The largest utilities ETFs, including the Utilities Select Sector SPDR (XLU) , are market cap-weighted, meaning these funds are often dominated by companies such as Duke (DUK) and Southern (SO). Those companies, which have an average market value of over $46 billion, combine for almost 17% of XLU’s weight.

Pepco closed with a market value of $5.71 billion Tuesday. It is 1.1% of XLU’s weight. Exelon is the ETF’s fifth-largest holding with an allocation of 5.85%. [A Soaring Leveraged Utilities ETF]

The $733.9 iShares U.S. Utilities ETF (IDU) has a combined 5.7% weight to Exelon and Pepco.

There are a couple of ETFs where Pepco looms large, comparatively speaking. The stock is the fifth-largest holding in the Guggenheim S&P Equal Weight Utilities ETF (RYU) at a weight of 3%. Exelon is RYU’s largest holding at 3.15%.

Another ETF where both stocks reside in the top-five holdings is the PowerShares S&P 500 High Dividend Portfolio (NYSEArca: SPHD) , which is one of the top-performing U.S. large-cap ETFs this year due in part to its almost 27% weight to utilities. [Quiet Rally for This Dividend ETF]

SPHD, which has a trailing 12-month yield of 3.33%, features six utilities stocks among its top-10 holdings, including Pepco and Exelon as its two largest holdings. Those stocks combine for 6.2% of SPHD’s weight.

SPHD tracks the S&P 500 Low Volatility High Dividend Index, which is comprised of 50 stocks taken from the S&P 500 that have historically exhibited high dividend yields and low volatility. Consumer staples and financial services combine for another 34% of the ETF’s weight.

Guggenheim S&P Equal Weight Utilities ETF

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ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.