In my opinion, Vanguard remains the king of the Exchange Traded Fund (ETF). The company offers a long list of great funds covering a wide selection of categories, almost all of which have very low expense ratios, leaving you with more money in your pocket. But with so many ETFs to choose from, how do you know which one is right for you? Whatever your investing style, there’s one Vanguard ETF everyone will love.
When it comes to ETFs, few can match the power of ETFs Vanguard Utilities ETF (NYSEMKT: VPU). This remains one of my all-time favorite Vanguard ETFs because it suits just about any type of investor. Looking for long-term profits? With this ETF you are insured. Want to mitigate your downsides in a bear market? Again, this is the ETF for you.
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As the name suggests, the Vanguard Utilities ETF invests primarily in utilities. These are the companies that provide electricity, natural gas, water and other critical resources to communities. You are probably a customer of a utility company yourself. Maybe you pay several each month to power your home, heat your home and maintain access to clean drinking water.
If that’s you, it won’t be hard to see how these companies can help minimize volatility in your portfolio. Few people see a dramatic reduction in their electricity or heating needs just because there is an economic recession.
Furthermore, many of these utilities have near-monopolies over their coverage areas. As a result, regulators often choose to limit their profit margins, but in return these companies also receive price floors. So even if the markets crash, they can charge their customers similar prices. And because volumes don’t drop much during a recession, overall profits are hardly affected, even as other sectors suffer.
Here are a few examples. In 2018, the S&P500 index lost 6% of its value. Still, the Vanguard Utilities ETF gained about 4%. Subsequently, the S&P 500 fell 19% in 2020. However, this ETF crushed the market again, losing less than 1%.
Don’t think the Vanguard Utilities ETF is just for bear markets. This year alone, its value has increased by almost 40%, with an annual average long-term return of around 9.7%. But before you jump in, there are two things investors need to know.
Before purchasing an ETF, it is important to assess its expense ratio. Fees are one of the biggest determinants of whether an ETF will build value for your portfolio over the long term. Any increase in the expense ratio reduces the amount of money that continues to increase in value over time. Even a small difference can have a big impact in the long run.
