Investing in utility ETFs is wise for defensive strategies. They offer steady dividends and low volatility, ensuring consistent returns and reduced risk even in economic downturns. As utilities shift from fossil fuels, they can achieve more stable costs and profitability, less affected by the fluctuations of fossil fuel prices.
To that end, iShares U.S. Utilities ETF (IDU), Vanguard Utilities Index Fund ETF Shares (VPU), and The Utilities Select Sector SPDR Fund (XLU) could be great choices for defensive investing. Before diving deeper into the stats of these ETFs, let’s discuss what makes the investment case strong for utility ETFs.
The utility sector is promising due to its defensive nature and resilience in volatile markets. Essential services like electricity and water ensure steady demand, while expectations of lower interest rates enhance profitability. This stability supports consistent revenues and dividends, making utilities attractive in uncertain economic times.
Notably, the global utilities market is projected to grow at a CAGR of 6.8%, reaching $8.31 trillion by 2027.
The U.S. utility sector began 2024 strong, adding 5,585 MW of new capacity, a 28% rise from last year. The Federal Reserve has kept interest rates high with only one cut expected in 2024. Despite easing inflation, borrowing costs remain elevated. Investing in utility stocks might be wise as they offer steady returns and can benefit from potential future rate cuts.
Given this backdrop, let’s evaluate the three Utility ETFs picks, starting with number three.
ETF #3: iShares U.S. Utilities ETF (IDU)
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, specifically in stocks of companies operating across 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 by using a representative sampling technique.
With $1.16 billion in assets under management (AUM), IDU’s top holding is NextEra Energy, Inc. (NEE) with a 12.04% weighting, followed by Southern Company (SO), with a 6.94% weighting, and Waste Management, Inc. (WM), with 6.87%. It has a total of 46 holdings.
It has an expense ratio of 0.40%, higher than the category average of 0.44%. It currently has a NAV of $88.19. IDU’s fund inflows came in at $259.43 million over the past six months.
The ETF pays an annual dividend of $2.17, which yields 2.47% on the current price. It has a four-year average dividend yield of 2.64%. IDU’s dividend payouts have increased 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.
IDU’s POWR Ratings reflect this promising outlook. The IDU’s overall A rating equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
IDU has an A grade for Buy & Hold, Peer, and Trade. Of the 13 ETFs in the B-rated Utility ETFs group, it is ranked #4. Click here to access all of IDU’s POWR Ratings.
ETF #2: Vanguard Utilities Index Fund ETF Shares (VPU)
VPU is an exchange-traded fund launched and managed by The Vanguard Group, Inc. The fund invests in the public equity markets of the United States, specifically in stocks of companies operating across 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 by using a full replication technique.
With $5.47 billion in AUM, the fund has a total of 68 holdings. VPU’s top holding is NEE with a 13.65% weighting, followed by SO with a 6.97% weighting, and Duke Energy Corporation (DUK) with 6.64%.
VPU has an expense ratio of 0.10%, lower than the category average of 0.44%. It currently has a NAV of $148.40. Its fund inflows came in at $320.85 million over the past six months.
The fund’s annual dividend of $4.87 yields 3.28% on the current share price. Its four-year average yield is 3.10%. Its dividend payouts have increased 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 strong outlook is reflected in its POWR Ratings. The ETF has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
It has an A grade for Buy & Hold and Trade and a B for Peer. It is ranked #2 in the same group. To access all the POWR Ratings for VPU, click here.
ETF #1: The Utilities Select 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 public equity markets of the United States, specifically in stocks of companies operating across 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 by using a full replication technique.
With $13.86 billion in assets under management (AUM), XLU’s top holding is NEE with a 13.98% weighting, followed by SO, with an 8.19% weighting, and DUK, with 7.44%. It has a total of 32 holdings.
XLU has an expense ratio of 0.09%, higher than the category average of 0.44%. It currently has a NAV of $68.54. Its fund inflows came in at $1.34 billion over the past three months.
The ETF pays an annual dividend of $2.19, which yields 3.20% on the current price. It has a four-year average dividend yield of 3.10%. Its dividend payouts have increased at a CAGR of 3.6% over the past three years and 3.5% over the past five years.
XLU has gained 8.2% over the year-to-date and 21.4% over the past nine months to close the last trading session at $68.55.
XLU POWR Ratings reflect its promising prospects. The ETF’s overall A rating equates to a Strong Buy in our proprietary rating system.
XLU has an A grade for Buy & Hold and Trade. In the Utility ETFs group, it is ranked first. Click here to access all of XLU’s POWR Ratings.
What To Do Next?
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XLU shares were trading at $68.62 per share on Monday afternoon, up $0.07 (+0.10%). Year-to-date, XLU has gained 10.13%, versus a 17.49% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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