In my view, Vanguard remains the exchange-traded fund (ETF) king. The company offers a long list of great funds covering a wide selection of categories, nearly all of which have very low expense ratios -- keeping more money in your pocket. But with so many ETFs to choose from, how do you know which one is right for you? No matter what your investing style is, there's one Vanguard ETF that everyone will love.
When it comes to ETFs, few can match the might of the Vanguard Utilities ETF (NYSEMKT: VPU). This remains one of my favorite Vanguard ETFs of all time because it's suitable for nearly any type of investor. Looking for long-term gains? This ETF has you covered. Looking to mitigate your downside in a bear market? Yet again, this is the ETF for you.
As its name suggests, the Vanguard Utilities ETF invests primarily in utility businesses. These are the companies that deliver electricity, natural gas, water, and other critical resources to communities. You likely are a customer of a utility yourself. Perhaps you pay several every month to power your house, heat your home, and maintain access to clean drinking water.
If that's you, it won't be hard to see how these businesses can help minimize volatility in your portfolio. Few people see a dramatic reduction in their electricity or heating needs just because there's an economic recession.
Plus, many of these utilities have near-monopolies over their coverage areas. Due to this, regulators often choose to cap their profit margins, but in return, these companies also receive price floors. So even if markets tank, they can charge customers similar prices. And because volumes don't dip much during a recession, overall profits barely take a hit even as other industries struggle mightily.
Here are a few examples. In 2018, the S&P 500 index lost 6% of its value. Yet the Vanguard Utilities ETF gained roughly 4%. Then in 2020, the S&P 500 plunged by 19%. This ETF, however, once again crushed the market, losing less than 1%.
Don't think the Vanguard Utilities ETF is only for bear markets. This year alone, its value has soared by nearly 40%, with a long-term annual average return of around 9.7%. But before you jump in, there are two things investors should know.
Before you buy any ETF, it's important to review its expense ratio. Expenses are one of the biggest determinants of whether or not an ETF will accrue long-term value for your portfolio. Every increase in expense ratio reduces the amount of money left to compound in value over time. Even a small difference can make a big impact over the long run.
Luckily, as with most Vanguard ETFs, the Vanguard Utilities ETF charges an expense ratio of just 0.1% -- far below the industry average of around 1% for funds focusing on the utility sector.
The second thing to know is that while this ETF has posted strong long-term returns, they still lag the S&P 500 over long periods of time. So unless you need the minimized volatility -- say, if you are retired or are investing cash that you'll need access to in a few years -- stick with an ETF that covers a wider breadth of the market. These funds will often come with even lower expense ratios, too.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.