ETFs
$10,000 in this high-yielding Vanguard ETF carries an annual fee of just $10, and it beat the S&P 500 and Nasdaq Composite in 2024
This low-growth sector rewards investors in other ways.
THE S&P500 And Nasdaq Composite have both posted excellent gains so far this year and are hovering around all-time highs. But surprisingly, the utilities sector has produced a total return of 13.9% year to date, outpacing 11.9% for the S&P 500 and 13.8% for the Nasdaq Composite.
Vanguard offers low cost products exchange traded funds (ETF) for the 11 market sectors. Since the beginning of the year, the Vanguard Utilities ETF (Virtual virtual unit 1.85%) is on par with the Vanguard Communications Services ETF as the best performing sectors this year – even better than technology.
With an expense ratio of just 0.1%, $10,000 invested in the Vanguard Utilities ETF incurs only $10 in annual fees. Here’s why this ETF is a great way to invest in the sector, as well as the pros and cons of buying the fund now.
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An introduction to the utility sector
Utilities make up just 2.3% of the S&P 500, making it one of the smallest sectors in terms of weighting. The Vanguard Utilities ETF reflects the performance of the sector, comprised of 62.5% electric utilities, 25.3% multi-utilities, 4.2% gas utilities, 3.8% utilities water, 3.4% independent power producers and energy traders and 0.9% renewable electricity.
The Vanguard Utilities ETF performed abysmally last year, falling more than 10% compared to a 24.2% gain for the S&P 500. Inflation and rising interest rates were the main causes of the sector’s poor performance.
Many utilities work with regulators and government agencies to set prices, which ensures stable cash flow but also limits growth potential. In this view, utilities do not benefit as much from economic growth, but they are resilient to recessions.
Due to the structure of their business model, utilities tend to pass on most of their profits to investors in the form of dividends. The Vanguard Utilities ETF yields 3.3%, far more than the S&P 500 and most other sectors.
But when the risk-free 10-year Treasury rate is between 4% and 5%, the opportunity cost is higher for investing in income-oriented stocks rather than taking a safe bet.
When approaching low-growth stocks, investors look for stability and high yield to compensate for the risk they take with stocks rather than bonds or risk-free assets. When low-growth stocks yield less than the risk-free rate, their potential risk/return ratio is relatively less attractive.
Over time, utilities will benefit from a growing population and higher energy consumption. And many power utilities have invested in renewable energy assets to drive growth. But stay, dividend is the main attraction with this type of investment.
Deliver value and passive income
At the start of the year, there was hope that the Federal Reserve would begin lowering interest rates, but it remains to be seen when rate cuts will begin, if at all, in 2024. With the 10-year Treasury yield currently at 4.5%, you may be wondering why the Vanguard Utilities ETF has gained so much this year compared to other sectors.
I think this is largely due to the sector’s high yield and inexpensive valuation. The Vanguard Utilities ETF has a price-to-earnings (P/E) ratio of 22.1 and, as mentioned, a yield of 3.3%. That’s an attractive profile compared to the S&P 500’s 27.6 P/E and 1.3% yield.
It also compares well to other safe, low-growth ETFs and stocks. THE Vanguard Consumer Staples ETF (NYSEMKT:VDC) has a yield of 2.5%, a P/E of 26.1 and is also hovering around an all-time high. Certainly, there are more attractive options in this sector, such as Coca-Cola, with his Yield of 3.1% and P/E of 25.3.
Another sector that stands out in combining value and income is that Vanguard Energy ETF, which yields 3% and has a P/E of just 8.2. It seems too good to be true at first glance, and in some ways it is.
Oil and gas companies are in expansion mode and generating outsized profits. When approaching a cyclical industry, it’s not a good idea to look only at the P/E, as it can look very cheap in boom times and inflated in downturns.
Still, the energy sector and the Vanguard Energy ETF may be better suited for investors who don’t worry about the volatility of oil and gas and the upside potential of earnings growth, and who want to invest in a sector focused on value and income. .
A good solution for risk-averse investors
Overall, the Vanguard Utilities ETF offers a compelling balance of value and income compared to other ETFs and stocks. The strong performance of utilities indicates that the recovery is not just about growth stocks. Many dividend-heavy companies outperform benchmarks and reach unprecedented heights.
Many sectors and stocks simply aren’t as cheap as they once were, but that doesn’t mean investors should mash the sell button or stop pouring new capital into the market. Despite its slow growth, the Vanguard Utilities ETF stands out as a great choice if you’re looking for a safe place to park your money and earn passive income, but there might be even better sectors if you’re ready to take the plunge. more risk.