Utilities are an underutilized diversifier, dividend income source, and defensive equities sector. Here we’ll review the best Utilities ETFs for 2022.
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In a hurry? Here’s the list:
- XLU – Utilities Select Sector SPDR Fund
- VPU – Vanguard Utilities ETF
- FUTY – Fidelity MSCI Utilities Index ETF
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Introduction – Why Utilities?
Utilities refer to basic, regulated public services like water, natural gas, electricity, and sewage. Investing in the utilities sector provides long-term investors with stable income from dividends, as well as lower volatility and low correlation relative to the total stock market. Utilities also tend to perform well during market downturns, as demand for utilities is relatively constant.
Consequently, overweighting utilities in one’s portfolio may offer a diversification benefit, reducing overall portfolio volatility and risk. For the period 1999 through July 2020, adding a 10% tilt to Utilities did precisely that compared to the total stock market, resulting in higher general and risk-adjusted returns with lower volatility and smaller drawdowns.
Utilities may even be preferable to REITs and Commodities. Utility operating costs are passed to the ratepayer, and using utilities over REITs lets you avoid the idiosyncratic risks associated with real estate markets. Moreover, of all sectors, Utilities are the least explained by the known equity risk factors that explain the differences in returns between diversified portfolios. I explored this concept further here.
Let’s look at the best Utilities ETFs.
The 3 Best Utilities ETFs
Below are the 3 best Utilities ETFs:
XLU – Utilities Select Sector SPDR Fund
The Utilities Select Sector SPDR Fund (XLU) is the most popular Utilities ETF on the market, with over $11 billion in assets. The fund seeks to track the Utilities Select Sector Index, providing broad exposure to utilities across the U.S. This ETF was established in 1998 and has an expense ratio of 0.13%.
VPU – Vanguard Utilities ETF
Next in popularity is the Vanguard Utilities ETF (VPU), with over $5 billion in assets. The fund seeks to track the MSCI US Investable Market Utilities 25/50 Index, and is comparable to XLU above. This ETF has over 60 holdings and an expense ratio of 0.10%.
FUTY – Fidelity MSCI Utilities Index ETF
Another low-fee option for utilities is the Fidelity MSCI Utilities Index ETF (FUTY), established in 2013. This ETF is the cheapest on the list, with an expense ratio of 0.08%. The fund seeks to track the MSCI USA IMI Utilities Index.
Where to Buy These Utilities ETFs
All these Utilities ETFs should be available at any major broker. My choice is M1 Finance. The broker has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, and a sleek, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.
Disclosures: I am long VPU.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.
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