ETFs for Utilities: The S&P 500 Utilities Index has gained more than 30% over the last year, but with this growth comes increased risk as the sector’s volatility increased to almost 28% from January 2022.
This makes it even more important to find the right ETFs for utilities to add to your portfolio without unduly exposing yourself to unnecessary market risks. To help you find the best ETFs for utilities, here are some of the most popular ones on the market today.
The utility sector is a crucial part of any well-diversified investment portfolio. After all, the role of utilities is to provide the world with essential services like power, water and gas. Utilities can be risky as well as rewarding. You can choose from many different types of utility ETFs available.
Regarding equity ETFs, some are more suitable for particular investors than others. For example, if you’re looking to invest in a sector that isn’t particularly volatile and is also less risky, then you might want to consider investing in utility stocks with an ETF.
In this article, we’ll look at the pros and cons of investing in utility stocks through an ETF and the available best ETFs for utilities.
What are utilities?
Utilities are non-cyclical and one of the most essential sectors of the economy. It provides critical services like electricity, water, gas and other services essential to modern life. They are also typically stable and defensive, often less affected by economic downturns. For these reasons, many investors view utility stocks or ETFs as a safe haven during market volatility.
When investing in the utility sector, investors can choose from various investment vehicles, such as mutual funds and ETFs, with different exposure levels so that investors can decide what is best for achieving their portfolio objectives & investment goals.
Why invest in Utility Funds?
Utilities are a defensive sector, meaning they are less vulnerable to changes in economic conditions. Plus, utilities typically have lower price-to-earnings ratios and dividend yields than other sectors.
In addition to being a good way to play defence during an uncertain time, utility stocks make up 9 out of the top 10 holdings in ETFs that follow this sector. These ETFs may be a good option if you’re looking to diversify your income portfolio.
What to Look for in a Good ETF for Utilities?
Diversification: The first thing to assess when trying to find the best ETFs for utilities is whether or not the ETF is diversified. If you purchase an ETF for utilities, you want to ensure it has a wide mix of different companies with large holdings across the utility sector. This diversification can help to protect you from the risk of one or two companies having a significant impact on your investment during any economic event.
Liquidity: The second thing to assess is how accessible the ETF for utilities is. You don’t want to purchase an ETF for utilities and then find it incredibly difficult to buy or sell. You should be able to find an ETF that is easy to access through your online broker or any other investment platform that you use.
Good Expense Ratio: A low-cost fund usually provides a higher return over time than a high expense ratio. An expense ratio of 1% or less is a good benchmark. However, an expense ratio does not tell you how profitable a fund will be.
Track Record: The ETF utility’s track record provides valuable insights into how the fund has performed. The information can help you make a more informed decision about whether or not to invest in the fund. The track record can also provide information about the volatility of the ETF and the types of investments that the ETF holds.
The risk associated with investing in Utility ETFs
Generally speaking, every investment comes with low or high market risk. The risk associated with investing in ETFs is buying shares of stocks and bonds that can fluctuate in value over time.
ETFs can have higher rates of return than mutual funds but also carry more risk. The reason is that ETFs are not actively managed funds like mutual funds. That said, ETFs for utilities are not too risky because they only include high-quality stocks from large companies that produce reliable products or provide necessary services like electricity or water.
As with any investment, you should research before deciding where to put your money. ETFs for utilities seem like a good choice if you’re looking for low-risk investments that still offer relatively high potential returns.
What are the best ETFs for utilities?
Utility ETFs are a great way to invest in this industry, but there is no one-size-fits-all investment. You can consider including Utility ETFs in your portfolio to make it well-diversified. The best ETFs for utilities vary based on what you are looking to gain.
I have listed some of the ETFs with great Total returns over the past years.
Data Source: Yahoo Finance
If you want to get exposure to electric utilities, then the Market Vectors Electric Utilities ETF (EVX) could be one option you may need.
From the above-listed ETFs, Vanguard’s Utility ETF (VPU) might be your best option if you’re looking for an all-around investment with exposure across sectors and geographical regions of the economy.
How to choose the right ETF for your portfolio
ETFs have become more popular as investors seek low-cost investments that provide diversification, liquidity and exposure to various industries and markets. Some ETFs track stocks, while others track bonds or commodities.
When choosing the best ETF for your portfolio, it’s important to consider your investment objectives and risk tolerance. Broad-based ETFs provide diversified exposure to the utility sector, while sector-specific ETFs offer a more concentrated exposure.
If you’re looking for a safe haven in market turbulence, utility stocks and ETFs may be a good fit for your portfolio.
When you want to diversify your portfolio and invest in ESG (Environmental, Social and Governance) funds that screen investment based on corporate policies, there are fossil-fuel-free exchange-traded funds based on MSCI indexes. These funds mostly focus on U.S. large-cap and other emerging-markets stocks with expense ratios between .20% to.30%.
Other popular categories in the ETF space are MLP ETFs and Energy Infrastructure ETFs. MLP ETFs can provide investors with an efficient way to gain exposure to the energy infrastructure sector. These funds offer diversification and the potential for high distribution yields. Energy Infrastructure ETFs are either structured as pass-through entities or exposed to corporate tax if they own more than 25% of MLPs.
Three MLP ETFs are taxed as corporations are the only ones. C-Corp MLP Funds are taxed as corporations and therefore accrue a deferred tax liability for gains in their underlying positions and for distributions from MLPs, which are the tax-deferred return of capital.
An ETF (exchange-traded fund) is an investment fund that tracks an index or a set of assets where you don’t need to manage it actively.
While ETFs can help investors diversify their investments and meet portfolio objectives, it is important to remember that no investment is a “sure thing.” There is no such thing as a risk-free investment, and there is always the possibility of losing money when investing in an ETF. Because of these risks, it is important for investors to do their research and understand what they are getting into before deciding to invest in an ETF.
You can look at the utilities ETFs list and take the help of the ETF screener
The main benefit of investing in a utility ETF is that you can buy into a diversified portfolio at a lower cost than buying individual stocks. Since the risks are spread across all the utility companies in the index, making ETFs less risky investment option.
A downside to ETFs is that they are not actively managed and do not have the same trading activity level as mutual funds. ETFs may be less volatile than actively managed mutual funds but also more susceptible to large price swings when the market changes direction.
Frequently Asked Questions (FAQs):
The utility sector is considered stable and less volatile even during an economic downturn. This is simply because utility companies provide essential services such as gas, water and electricity, which never go out of demand.
There are a couple of volatile sectors. The energy, Healthcare, Banking and technology sectors tend to display high volatility during economic or geopolitical events.
Utility companies are heavily regulated and pay stable dividends through the years
Energy prices, such as oil, natural gas, and electricity, are more volatile due to changes in demand and supply and are subject to geopolitical changes than other commodities. A rise in economic activity generates a large energy demand, but a drop in energy prices has little effect on demand.
Generally, investing in the utility sector is a good idea when GDP is not accelerating at a significant pace and the economy contracts.