Should you move some of your investments into the Utilities Sector?
We may be heading into a recession, what sectors should you focus on to protect your investments?
Utility companies tend to perform relatively well during a recession or economic downturn, as they provide essential services such as electricity, gas, and water that people and businesses require regardless of the economic conditions.
During a recession, consumers may reduce their spending on discretionary items, such as entertainment or luxury goods, but they will still need to pay their utility bills. This means that utility companies typically have relatively stable revenue and earnings, which can make them an attractive investment during times of economic uncertainty.
Moreover, utility companies tend to have a more defensive business model, meaning that they are less sensitive to economic cycles compared to other sectors such as consumer discretionary or technology. This can make them a good option for investors who are seeking stability and income during a recession.
You could pick some top Utilities company’s invest individually in such as:
- NextEra Energy (NEE): This company is the world’s largest producer of wind and solar energy and is a leading power company in the US. It has a strong balance sheet, a diversified generation portfolio, and a history of solid financial performance.
- Dominion Energy (D): This company is one of the largest producers and transporters of energy in the US. It has a diversified business model, including regulated and non-regulated operations, and is investing heavily in renewable energy sources.
- Duke Energy (DUK): This company is one of the largest electric power holding companies in the US and provides electricity to 7.7 million customers across six states. It has a diversified portfolio of power generation sources, including nuclear, coal, natural gas, and renewables.
- National Grid (NGG): This is a UK-based multinational electricity and gas utility company that operates in the UK and the northeastern United States. It has a regulated business model, which provides a stable source of revenue and has a strong track record of paying dividends.
- American Water Works (AWK): This company is the largest publicly traded water and wastewater utility company in the US, serving approximately 15 million people across 46 states. It has a regulated business model, a strong balance sheet, and a history of stable financial performance.
If you have enough money to spread around to stay diversified that would be fine. Maybe the better option would be to simply invest in an Exchange Traded Fund (EFT) that does the diversification for you.
What are some good Utilities Exchange Traded Funds?
Exchange-traded funds (ETFs) are investment funds that trade on stock exchanges and can be bought and sold like stocks. Here are some good utilities ETFs:
- Utilities Select Sector SPDR Fund (XLU): This ETF seeks to track the performance of the utilities sector of the S&P 500 index. It holds companies that provide electricity, natural gas, and water services.
- iShares U.S. Utilities ETF (IDU): This ETF seeks to track the investment results of an index composed of U.S. equities in the utilities sector. It holds large-cap utility companies that are included in the S&P 500 index.
- Vanguard Utilities ETF (VPU): This ETF seeks to track the performance of the MSCI US Investable Market Utilities 25/50 Index. It holds a diversified portfolio of U.S. utility companies.
- First Trust Utilities AlphaDEX Fund (FXU): This ETF seeks to track the performance of the StrataQuant Utilities Index, which uses a quantitative methodology to select and rank U.S. utility companies.
- Global X YieldCo & Renewable Energy Income ETF (YLCO): This ETF invests in renewable energy and utilities companies that generate significant income from long-term contracts. It focuses on companies that own and operate renewable energy assets such as solar and wind farms.
- iShares Global Utilities ETF (JXI): This ETF provides exposure to global utility companies in developed and emerging markets. It includes large-cap companies that provide electricity, gas, and water services.
I have always been partial to the Vanguard funds, not 100% sure why, they have just performed well for me in the past.
Top Holdings of VPU:
- NextEra Energy Inc (NEE) – 11.8%
- Duke Energy Corp (DUK) – 7.5%
- Dominion Energy Inc (D) – 5.3%
- Southern Co (SO) – 5.3%
- American Electric Power Co Inc (AEP) – 5.2%
- Exelon Corp (EXC) – 4.9%
- National Grid plc (NGG) – 4.6%
- Sempra Energy (SRE) – 4.4%
- Xcel Energy Inc (XEL) – 4.3%
- PPL Corp (PPL) – 3.9%
These top ten holdings make up approximately 53.2% of the fund’s total net assets.
What is the VPU 10 year rate of return?
As of March 1st, 2023, the 10-year rate of return for the Vanguard Utilities ETF (VPU) is approximately 9.93% according to Morningstar. However, it is important to note that past performance is not a guarantee of future results and that the value of an investment in an ETF, like VPU, can rise or fall over time, and you could lose money.
Right now VPU is paying a quarterly dividend of $1.20 or 3.27% annualized. Overall, this is not a bad return on your investment.
As of, 3/2/23, VPU is down pretty significantly and is in a really good buy area. I am picking some up myself, maybe you should also if it meets your long term investment goals.