Vanguard’s Utilities ETF has generated strong annual returns for decades.
Got $500 to invest? The Vanguard Utilities ETF (VPU -0.76%) should be at the top of your shopping list. Since 2004, this exchange-traded fund (ETF) has generated an 8.9% annual return. These returns have been remarkably consistent, with positive returns posted in nearly every period, including recent one-year, three-year, five-year and 10-year periods.
If you want your money to keep growing with minimal volatility, keep reading.
Don’t ignore those “boring” profits
Utilities are usually dismissed as “boring” businesses. And in many ways they are. Many utility stocks, for example, are regulated utilities. This means that they are given a monopoly to supply a certain resource – such as water or electricity – to a certain community. In exchange for this monopoly, the company agrees to limit how much profit it can make.
Thus, utilities often become slow but steady performers. Let’s use a company like Hydro One as an example. Hydro One is a regulated utility that supplies – you guessed it – hydropower to residents of Ontario, Canada. Its power distribution network manages 98% of the high voltage transmission lines across the province. In return for this monopoly, its interest rates are capped by the provincial government.
In strong bull markets, regulated utilities like Hydro One tend to underperform. This is because these companies cannot suddenly raise their rates. Their profits are in many ways already determined by regulators. Over the past 12 months, for example, Hydro One has delivered a total shareholder return of just 1.08%. The S&P 500in comparison, increased by nearly 30% in value during this time period.
Still, zoom in even further and you quickly begin to understand the power of these businesses. Over the past five years, for example, shares of Hydro One have actually outperformed the S&P 500, despite underperforming the market by nearly 30% over the past 12 months. That’s because utility stocks like this one often weather economic shocks better than other businesses. Demand for energy and water, for example, does not fluctuate much during a recession. And just as predetermined profit margins hurt utilities during bull markets, they insulate these firms from pain during bear markets. During the 2020 flash crash and the 2022 mini bear market, for example, Hydro One stock performed healthily above the general market weakness.
Utilities can insulate your portfolio from bear markets and volatility in general. And as we’ll see, Vanguard’s Utilities ETF is your best way to get immediate exposure.
^SPXTR data from YCharts
Vanguard’s Utilities ETF is a superior choice
Investing in utility stocks can help you generate reliable, long-term returns that can beat the market, especially during a downturn. But which utility stocks should you choose? Vanguard’s Utilities ETF removes the guesswork at a very reasonable price. This ETF instantly spreads your money among 65 utility stocks. Its expense ratio is just 0.10%, meaning you’ll only pay $1 in fees per year for every $1,000 you invest. The average expense ratio for utility ETFs, by comparison, is 0.97% — nearly 10 times that. Plus, this ETF has a strong long-term track record, generating nearly 9% annualized returns since the fund’s inception two decades ago.
Will This ETF Make You An Overnight Millionaire? Almost certainly not. But will it grow your money with less volatility than the market? That’s a good bet. Vanguard’s Utilities ETF, for example, has a beta of just 0.69 vs Dow Jones Industrial Average. In simple terms, this means that the ETF is approximately 30% less volatile than the market as a whole.
If you’re still not convinced, just know that now is probably the best time to buy this ETF in years. As mentioned, utility stocks often underperform the market during strong bull markets like the one we’re in right now. Last year was the ETF’s worst-performing year in decades. It has lost about 7.5% of its value in 2023. If history is any suggestion, now is the time to buy. In 2020, for example, the ETF lost 1% of its value. Next year, it acquired more than 17% in value! In 2015, the ETF lost 5% of its value, only to post another 17% return the following year.
Buying utility stocks when they are out of favor has been a profitable strategy for decades. The Vanguard Utilities ETF allows you to invest in this opportunity quickly and efficiently.
Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
