The S&P500 And Nasdaq Composite both have posted excellent gains so far this year and are hovering around record highs. But surprisingly, the utilities sector has delivered a total return of 13.9% year to date – more than 11.9% for the S&P 500 and 13.8% for the Nasdaq Composite.
Vanguard offers low-cost Exchange Traded Funds (ETFs) for all eleven market sectors. So far the Vanguard Utilities ETF (NYSEMKT: VPU) is connected to the Vanguard Communication Services ETF as the best performing sectors this year – even better than technology.
With an expense ratio of just 0.1%, $10,000 invested in the Vanguard Utilities ETF comes with just $10 in annual fees. Here’s why this ETF is a great way to invest in the sector, and the pros and cons of buying the fund now.
An introduction to the utility industry
Utilities make up just 2.3% of the S&P 500, making them one of the smallest sectors in terms of weighting. The Vanguard Utilities ETF reflects the performance of the sector, consisting of 62.5% electric utilities, 25.3% multi-utilities, 4.2% gas utilities, 3.8% water utilities, 3.4% independent energy producers and energy traders, and 0 .9% renewable electricity.
The Vanguard Utilities ETF performed terribly last year, falling more than 10% compared to a 24.2% gain in the S&P 500. Inflation and higher interest rates were the main causes of the sector’s weak performance.
Many utilities work with regulators and government agencies to set prices, which provides stable cash flow but also limits growth potential. In this sense, utilities do not benefit as much from economic growth, but they are resilient to recessions.
Due to the structure of their business models, utilities tend to pass on the majority of their profits to investors through dividends. The Vanguard Utilities ETF yields 3.3%, much more than the S&P 500 and most other sectors.
But when the risk-free rate on 10-year government bonds is between 4% and 5%, there is a higher opportunity cost of investing in income-oriented stocks instead of taking the sure bet.
When approaching low-growth stocks, investors want stability and high returns to compensate for the risk they take on stocks, rather than bonds or risk-free assets. When low-growth stocks return less than the risk-free rate, their risk/potential reward is relatively less attractive.
Over time, utilities will benefit from a growing population and higher energy consumption. And many electric utilities have invested in renewable energy sources to fuel growth. But still, the dividend is the main draw for these types of investments.
Delivering value and passive income
At the beginning of the year, there was hope that the Federal Reserve would cut rates, but it remains to be seen when the rate cuts will begin in 2024, if at all. With 10-year Treasury yields currently at 4.5%, you might be wondering why the Vanguard Utilities ETF has risen so much this year compared to other sectors.
I think this is largely due to the sector’s high yields and cheap valuation. The Vanguard Utilities ETF has a price-to-earnings ratio (P/E) of 22.1 and, as mentioned, a yield of 3.3%. That’s an attractive profile compared to the S&P 500’s 27.6 price/earnings and the S&P 500’s 1.3% interest rate.
It also fares well compared to other safe ETFs and low-growth stocks. The Vanguard Consumer Staples ETF (NYSEMKT: VDC) has a yield of 2.5%, a price-to-earnings ratio of 26.1 and is also hovering around an all-time high. Admittedly, there are more attractive options within that sector, for example Coca-Cola, with a return of 3.1% and a price/earnings of 25.3.
Another sector that stands out for combining value and income is the Vanguard Energy ETF, which yields 3% and has a price-to-earnings ratio of just 8.2. It seems too good to be true at first glance, and in some ways it is.
Oil and gas companies are in an expansion phase and generating excessive profits. When approaching a cyclical sector, it’s not a good idea to look solely at the price-to-earnings ratio, as it can look dirt cheap during a boom and be inflated during a downturn.
Still, the energy sector and the Vanguard Energy ETF could be better suited to investors who aren’t concerned about oil and gas volatility and any upside potential from earnings growth, and who want to invest in a value and income-oriented sector. .
A good choice for risk-averse investors
Overall, the Vanguard Utilities ETF offers an attractive balance of value and income compared to other ETFs and stocks. The strong performance of utilities indicates that the rally is not just in growth stocks. Many solid dividend companies are outperforming benchmarks and reaching record highs.
Many sectors and stocks are simply not as cheap as they used to be, but that doesn’t mean investors should hit the sell button or stop injecting new capital into the market. Despite the low growth, the Vanguard Utilities ETF stands out as an excellent choice if you’re looking for a safe place to park your money and earn passive income, but there may be even better sectors out there if you’re up for the challenge to enter into. more risk.
Should you invest $1,000 in the Vanguard World Fund – Vanguard Utilities ETF now?
Consider the following before purchasing shares in Vanguard World Fund – Vanguard Utilities ETF:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Vanguard World Fund – Vanguard Utilities ETF wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $677,040!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns May 28, 2024
Daniel Foelber 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.
$10,000 in this high-yield Vanguard ETF carries just a $10 annual fee, and has beaten the S&P 500 and Nasdaq Composite in 2024. Originally published by The Motley Fool
