ETFs
Top 3 Utility ETFs for Defensive Investing
Investing in utility ETFs makes sense for defensive strategies. They offer stable dividends and low volatility, ensuring consistent returns and reduced risk even during economic downturns. As utilities transition away from fossil fuels, they can achieve more stable costs and profitability, less affected by fluctuations in fossil fuel prices.
To this end, iShares US Utilities ETF (UDI), Shares of the Vanguard Utilities Index Fund (Virtual Power Unit) and the Utilities Sector SPDR Fund (XLU) could be excellent choices for a defensive investment. Before we look at the statistics of these ETFs in more detail, let’s discuss what makes these ETFs a solid investment.
The utilities sector holds promise because of its defensive nature and resilience in volatile markets. Essential services like electricity and water ensure stable demand, while expectations of lower interest rates improve profitability. This stability helps generate regular income and dividends, making utilities attractive in times of economic uncertainty.
It is worth noting that the global utilities market is expected to grow at a CAGR of 6.8%, reaching $8.31 trillion by 2027.
The U.S. utility sector started 2024 strong, adding 5,585 MW of new capacity, a 28% increase since last year. The Federal Reserve has kept interest rates high with only one cut expected in 2024Despite falling inflation, borrowing costs remain high. Investing in utility stocks can be a good idea, as they offer stable yields and can benefit from potential future rate cuts.
In this context, let us evaluate the three Utility ETFs choice, starting with number three.
ETF #3: iShares US Utilities ETF (UDI)
IDU is an exchange-traded fund launched by BlackRock, Inc. It is managed by BlackRock Fund Advisors. It invests in the public equity markets of the United States, with a focus on stocks of companies operating in the utilities sector. The fund invests in both growth and value stocks of companies with diversified market capitalizations. It seeks to track the performance of the Russell 1000 Utilities RIC 22.5/45 Capped Index using a representative sampling technique.
With $1.16 billion in assets under management (AUM), IDU’s largest holding is NextEra Energy, Inc. (BORN) with a weighting of 12.04%, followed by Southern Company (SO), with a weighting of 6.94%, and Waste Management, Inc. (WM), with 6.87%. It holds a total of 46 participations.
Its expense ratio is 0.40%, higher than the category average of 0.44%. It currently has a Net value IDU’s fund inflows reached $259.43 million in the last six months.
The ETF pays an annual dividend of $2.17, which represents a yield of 2.47% from the current price. Its four-year average yield is 2.64%. IDU’s dividend payments have grown at a CAGR of 1.6% over the past five years.
IDU has gained 24.5% over the past nine months and 10.3% year-to-date to close the last trading session at $88.16.
UDI POWR Ratings reflect this promising outlook. IDU’s overall A rating equates to a Strong Buy in our proprietary rating system. POWR Ratings are calculated by taking into account 118 different factors, each weighted to an optimal degree.
IDU has an A rating for Buy & Hold, Peer and Trade. Out of 13 ETFs it has a B rating Utility ETFs group, it is ranked #4. Click here to access all of IDU’s POWR Ratings.
ETF #2: Shares of the Vanguard Utilities Index Fund (Virtual Power Unit)
VPU is an exchange-traded fund launched and managed by The Vanguard Group, Inc. The fund invests in the U.S. public equity markets, with a focus on stocks of companies operating in the utilities sector. It invests in both growth and value stocks of companies with diversified market capitalizations. The fund seeks to track the performance of the MSCI US Investable Market Index (IMI)/Utilities 25/50 using a full replication technique.
With $5.47 billion in assets under management, the fund has a total of 68 holdings. VPU’s largest holding is NEE with a weighting of 13.65%, followed by SO with a weighting of 6.97%, and Duke Energy Corporation (DUK) with 6.64%.
VPU has an expense ratio of 0.10%, lower than the category average of 0.44%. Its current net asset value is $148.40. Its inflows were $320.85 million over the last six months.
The fund’s annual dividend of $4.87 yields 3.28% of the current share price. Its four-year average yield is 3.10%. Its dividend payments have grown at a CAGR of 5.1% over the past three years and 4.6% over the past five years.
VPU has gained 21.3% over the past nine months and 8.2% year-to-date to close the last trading session at $148.35.
VPU’s favorable outlook is reflected in its POWR Ratings. The ETF has an overall rating of A, which is a Strong Buy in our proprietary rating system.
It has an A rating for Buy & Hold and Trade and a B rating for Peer. It is ranked #2 in the same group. To access the full POWR Ratings for VPU, Click here.
ETF #1: The Utilities Sector SPDR Fund (XLU)
XLU is an exchange-traded fund launched by State Street Global Advisors, Inc. It is managed by SSGA Funds Management, Inc. It invests in the U.S. equity markets, with a focus on stocks of companies operating in the utilities sector. It invests in both growth and value stocks of companies with diversified market capitalizations. The fund seeks to track the performance of the Utilities Select Sector Index using a full replication technique.
With $13.86 billion in assets under management (AUM), XLU’s top holding is NEE with a weighting of 13.98%, followed by SO with a weighting of 8.19%, and DUK with 7.44%. It holds a total of 32 holdings.
XLU has an expense ratio of 0.09%, higher than the category average of 0.44%. Its current net asset value is $68.54. Its inflows were $1.34 billion over the last three months.
The ETF pays an annual dividend of $2.19, which represents a yield of 3.20% on the current price. Its four-year average yield is 3.10%. Its dividend payments have grown at a CAGR of 3.6% over the past three years and 3.5% over the past five years.
XLU has gained 8.2% year-to-date and 21.4% over the past nine months to close the last trading session at $68.55.
The XLU POWR Ratings reflect its promising outlook. The ETF’s overall A rating equates to a Strong Buy in our proprietary rating system.
XLU has been rated A for Buy & Hold and Trade. In the utility ETF group, it is ranked first. Click here to access all of XLU’s POWR Ratings.
What to do next?
Check out 10 widely held stocks that our proprietary model predicts have significant downside potential. Make sure none of these “death trap” stocks are lurking in your portfolio:
As of Monday afternoon, XLU shares were trading at $68.62 per share, up $0.07 (+0.10%). Year-to-date, XLU has gained 10.13%, compared to a 17.49% gain in the benchmark S&P 500 index over the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his career as a financial journalist because of his keen interest in detecting fundamental factors that influence the future performance of financial instruments. More…