Got $500 to invest? The Vanguard Utilities ETF (VPU 1.48%) should be at the top of your buy list. Since 2004, this exchange-traded fund (ETF) has generated 8.9% annual returns. These returns have been remarkably consistent, with positive returns posted over nearly every period, including the last 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 these "boring" profits
Utilities are typically dismissed as "boring" businesses. And in many ways, they are. Many utility stocks, for example, are regulated utilities. That means that they've been granted a monopoly to deliver a certain resource -- like water or electricity -- to a certain community. In exchange for this monopoly, the company agrees to cap how much profit it can produce.
In this way, 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 delivers -- you guessed it -- hydro power to residents in Ontario, Canada. Its power distribution network operates 98% of the high voltage transmission lines throughout the province. In exchange for this monopoly, its rates are capped by the provincial government.
In strong bull markets, regulated utilities like Hydro One typically underperform. That's because these companies can't suddenly raise their rates. Their profits, in many ways, have already been determined by regulators. Over the last 12 months, for example, Hydro One has delivered total shareholder returns of only 1.08%. The S&P 500, in comparison, increased nearly 30% in value over that time frame.
Yet zoom out further, and you quickly start to understand the power of these businesses. Over the last five years, for example, Hydro One stock actually outperformed the S&P 500, even though it has lagged the market by nearly 30% over the past 12 months. That's because utility stocks like this often weather economic turmoil better than other businesses. Energy and water demand, for example, don't fluctuate much during a recession. And just like predetermined profit margins hurt utilities during bull markets, they insulate these firms from pain during bear markets. During the 2020 flash crash and 2022's miniature bear market, for example, Hydro One stock healthily outperformed the market's general weakness.
Utility businesses 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 gain instant exposure.
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 downturns. But which utility stock should you choose? Vanguard's Utilities ETF removes the guesswork at a very reasonable price. This ETF instantly spreads your money across 65 utility stocks. Its expense ratio is just 0.10%, meaning you'll pay just $1 in fees annually for every $1,000 you invest. The average expense ratio for utility ETFs, for comparison, is 0.97% -- almost 10 times as much. Plus, this ETF has a strong long-term track record, producing nearly 9% annual returns since the fund's inception two decades ago.
Will this ETF make you a millionaire overnight? 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 instance, has a beta of just 0.69 versus the Dow Jones Industrial Average. In simple terms, that means the ETF is roughly 30% less volatile than the market overall.
If you're still not convinced, just know that now is possibly 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 lost around 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. The next year, it gained more than 17% in value! In 2015, the ETF lost 5% of value, only to post another 17% return the following year.
Buying utility stocks when they're out of favor has been a profitable strategy for decades. The Vanguard Utilities ETF lets you invest in this opportunity quickly and efficiently.
