I recently read something that might surprise many investors. There are more exchange-traded funds (ETFs) trading on U.S. exchanges than there are stocks. This might seem to pour cold water on the idea that selecting an ETF is easier than picking an individual stock.
One way to simplify the task is to limit yourself to one family of funds. Vanguard is a great choice, because it's known for offering low-cost funds. However, you might still be overwhelmed with the decision, since Vanguard markets 99 ETFs.
What's the best Vanguard ETF to invest $1,000 in right now? Different investors will probably have different opinions. Here are three key reasons, though, why I think the Vanguard Utilities ETF (VPU 0.35%) is the best pick.
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1. It's a good defensive play in a frothy market
I'll readily admit that I'm somewhat nervous about the stock market these days. The S&P 500 (SNPINDEX: ^GSPC) Shiller CAPE ratio is now at its second-highest level ever. The only time it was higher than the current mark was in early 2000, shortly before the dot-com bubble burst.
Could the stock market continue to soar? Absolutely. But is the kind of environment that Warren Buffett meant when he said it's smart to "be fearful when others are greedy"? I think so.
With that in mind, I believe the Vanguard Utilities ETF is a good defensive play in a frothy market. This ETF, as its name indicates, owns utility stocks -- 69 of them. Its top holdings include utility stalwarts such as NextEra Energy (NEE 0.61%), Constellation Energy (CEG 3.86%), Southern Company (SO +0.76%), Duke Energy (DUK +0.44%), and Vistra Energy (VST 3.28%).
Utility stocks tend to hold up pretty well during overall market turbulence. The nature of their businesses help, since many of them are regulated monopolies in their geographical markets.
Granted, this ETF isn't exactly cheap with the stocks in its portfolio trading at an average trailing 12-month price-to-earnings (P/E) ratio of 22.2. However, with the S&P 500 sporting a P/E multiple of 28.9, the Vanguard Utilities ETF looks like a bargain in comparison.
2. It pays an attractive yield
The Federal Reserve appears to be prepared to reduce interest rates further. Such moves usually cause bond yields to fall. And that could make ETFs with juicy yields more attractive to investors. The Vanguard Utilities ETF is a great example.
This fund offers a 30-day SEC yield of 2.65%. That's the second-highest yield among Vanguard's ETFs, excluding bond funds.
Importantly, the Vanguard Utilities ETF's yield is still appealing even after a strong year-to-date gain of more than 20%. This return makes the ETF the top performer in the Vanguard family that doesn't focus on international stocks.
NYSEMKT: VPU
Key Data Points
3. Its growth prospects appear to be solid
The Vanguard Utilities ETF's great performance so far this year underscores what I believe are its solid growth prospects. One factor supporting my optimism is that utility stocks have become a back-door way to profit from the artificial intelligence (AI) boom. Why is this the case? The data centers that host AI applications require massive amounts of electricity.
NextEra Energy, Constellation Energy, and Southern Company together make up nearly one-fourth of the Vanguard Utilities ETF's portfolio. It's no coincidence that all three companies highlighted AI data centers as key growth drivers in their most recent investor presentations.
NextEra noted that its energy resources unit has roughly 10.5 gigawatts of projects related to U.S. data center customers. Constellation pointed out that major technology companies are expected to invest a whopping $1 trillion in data centers over the next five years. Southern Company mentioned that its data center usage jumped 13% in the most recent quarter. I'm confident that we'd find similar comments in many of the other presentations of companies included among the Vanguard Utilities ETF's holdings.
AI isn't the only factor that could propel this Vanguard ETF higher over the next few years. However, it's definitely an important one.
