Utilities are an underutilized diversifier, dividend income source, and defensive equities sector. Here we'll review the best Utilities ETFs for 2024.
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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
Contents
Video
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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.
Canadians can find the above ETFs on Questrade or Interactive Brokers. Investors outside North America can use Interactive Brokers.
Disclosures: I am long VPU.
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Disclaimer: While I love diving into investing-related data and playing around with backtests, this is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a research report. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. I mention M1 Finance a lot around here. M1 does not provide investment advice, and this is not an offer or solicitation of an offer, or advice to buy or sell any security, and you are encouraged to consult your personal investment, legal, and tax advisors. Hypothetical examples used, such as historical backtests, do not reflect any specific investments, are for illustrative purposes only, and should not be considered an offer to buy or sell any products. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.
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From a tax efficiency perspective, the dividends paid by VPU are 100% qualified dividends, right?
Do you know if the dividends from XLU and FUTY are 100% qualified? I couldn’t find this information online. Thank you.
Would it be ok to make the generalization to say VNQ goes in tax-deferred and VPU goes in taxable (*IF* someone wanted to do so?) That’s kind of the vibe I’m getting from this article.
I may want to follow a strategy that recommends REITs at a small amount, but because it is a taxable account, I’m thinking to substitute VPU instead.
Hey Jon, yes, all else equal, VPU would be considered more tax efficient than VNQ.
Interesting article and topic. Thanks for sharing, John.
I fully understand the benefits of investing into utility EFTs. You’ve explained them well in this article.
On the opposite side, when I looked into the Top 10 holdings of e.g. VPU I saw that all of these companies are already in the S&P 500 index.
So let’s say we are already invested in S&P 500, for instance via VOO, wouldn’t it them just be more of the same also investing in VPU as we are already exposed to the exact same companies vis VOO?
Will enjoy to read your view on this.
Keep up the good work.
Thanks, Jake! You’re right, these would already be inside a broad market index fund. But a fund like VPU only comprises about 3% of VOO by weight, so for someone like me who wants to use Utilities as a hopeful diversifier, I’d have to consciously overweight them further by buying a dedicated utilities ETF. Does that make sense?
John, suppose Bob is a US-based investor who wants to add a slice of utilities (say, VPU) to his portfolio for its diversifying properties but needs to make some room for it. Should he carve space for VPU out of his domestic equity allocation, or out of his total equity allocation? I don’t suppose that it would matter too much, but I feel like there’s probably a more-or-less right answer — I just don’t know what it is! Thanks as always!
Thanks for the comment, Ross! I’d say total.
Do You recommend any global utilities ETF?
Thanks!
Probably not. Too expensive.
John, what is the highest percentage of utilities that you could use in your portfolio?
Thanks
Theoretically, as much as you’d like.