If you’re looking to buy the best utility exchange-traded funds (ETFs), seek out income, growth, diversification, or some combination of those goals. Utility stocks tend to pay above-average dividends. They have good long-term returns. They can also outperform the market during periods of volatility. For this reason, ETFs that invest in utilities can be useful tools.
What are utility exchange-traded funds?
Utility exchange-traded funds track a utility benchmark that may include electric, water, gas utility companies, and energy traders. Major publicly traded American utilities include NextEra Energy (NEE), Duke Energy (DUK), Dominion Energy, and Southern Company (SO).
What are the benefits?
There are three main benefits to investing in utility exchange-traded funds:
- Low Costs: Because they are passively managed, the expense ratios for ETFs are generally much lower than those available for actively managed mutual funds. This provides investors looking to invest in utility sector stocks with a convenient, low-cost, and diversified way to gain exposure to those stocks.
- Income from Dividends: Utility stocks often pay higher dividends than stocks in other sectors. This makes utility ETFs attractive to retail investors or consumers, especially retirees looking for income from their investments.
- Diversification: Sector funds are often used as tools to increase exposure to a certain area of the market that a portfolio may lack. Utility stocks are considered defensive by nature as they generally do not experience sharp price declines like aggressive stocks in a bear market.
What to look for in the best funds?
If you are looking for income, look at the yield of utility ETFs before buying. This yield is based on a 30-day period ending on the last day of the previous month. The number reflects the income and dividends earned during the period, after deducting fund expenses. Funds must report this number to the Securities and Exchange Commission (SEC).
Best exchange-traded funds for this year and beyond
The best utility exchange-traded funds will have a mix of high yield and low costs. Also, when buying ETFs in general, it is wise to look for funds that have a long track record and a large asset base. This provides a good record of the fund’s ability to track its index, and higher assets are associated with larger management.
With these qualities in mind, here are three of the best utility exchange-traded funds to buy this year:
- Vanguard Utilities ETF (VPU): If you are looking for a strong combination of yield and low costs, VPU is a great option. VPU tracks the MSCI US IMI Utilities Index, which consists of about 70 utility stocks such as NextEra Energy and Duke Energy. The current yield (as of December 10, 2021) was 3.0%. The expense ratio is 0.10%, or $10 per $10,000 invested.
- Utilities Select Sector SPDR (XLU): With $10 billion under management, XLU is the largest ETF by assets. The target index for XLU is the Utilities Select Sector Index. It includes many of the same stocks that are in VPU and other utility ETFs, but it is slightly more concentrated with 28 stocks. The yield over the 30-day period (as of December 11, 2021) for XLU was 2.93%. The expense ratio is 0.12%.
- Fidelity MSCI Utilities Index (FUTY): If low costs are your priority, you will love what you see in FUTY. It has an expense ratio of 0.08%, or $8 per $10,000 invested. Like Vanguard’s VPU, FUTY tracks the MSCI US IMI Utilities Index, which includes 70 utility stocks. The yield over the 30-day period for FUTY (as of December 10, 2021) was 2.94%.
Conclusion
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Exchange-traded funds (ETFs) for utilities are a smart way to add income-producing stocks to an investment portfolio. The utilities sector is considered defensive, making it a good hold in a downturn market. While it is also a relatively stable growth investment, it may not be suitable for everyone. As with other focused funds that concentrate on a single sector, it is wise not to allocate all your assets to just one fund.
The Balance does not provide tax, investment, financial services, or advice. Information is provided without regard to the investment objectives, risk tolerance, or financial circumstances of any specific investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risks, including the risk of loss of principal.
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Sources:
State Street Global Advisors. “Utilities Select Sector SPDR® Fund.”
Morningstar. “Highlighting Income: SEC Yield.”
Vanguard. “Vanguard Utilities ETF.”
Fidelity. “Snapshot: FUTY.”
Source: https://www.thebalancemoney.com/best-utilities-etfs-4175444
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