Vanguard’s S&P 500 ETF (VOO -0.36%), which passively tracks the S&P 500 (^GSPC -0.40%), is considered a reliable long-term investment. However, even though the S&P 500 has generated an average annual total return of about 10% since its inception, the benchmark index also typically suffers steep, double-digit declines during recessions.
Therefore, if you’re worried about a stock market correction, it might be smarter to invest in Vanguard’s Utilities ETF (VPU -0.95%) instead of the top S&P 500 ETF. Let’s see how VPU usually protects long-term investors — and why it might be worth nibbling on today.
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What does VPU own?
VPU passively tracks the MSCI U.S. Investable Market Index (IMI) Utilities 25/50, which tracks the U.S. utilities sector through small-cap, mid-cap, and large-cap companies. It manages $10.8 billion in assets, making it the second-largest U.S. utilities ETF after State Street’s Utilities Select Sector SPDR Fund (XLU -1.14%), which manages $22 billion.
But unlike XLU, which holds only the largest utility stocks in the S&P 500, VPU tracks a broader range of companies using a “25/50” diversification rule. First, no single company’s market cap can exceed 25% of VPU’s total market cap. Second, the combined weight of all companies that individually exceed 5% of VPU’s index cannot exceed 50% of the entire fund.
VPU currently holds 68 stocks with a median market cap of $4.8 billion. Electric utilities account for 61.8% of its portfolio, multi-utilities account for 24.6%, and the rest is split between gas, independent power, water, and renewable electricity providers. Its top holdings include NextEra Energy (11.78% of its portfolio), The Southern Company (6.92%), Duke Energy (6.34%), and Constellation Energy (5.26%).
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Why is VPU a safe ETF to own?
Utilities tend to underperform the S&P 500 in bull markets, when investors are rushing toward higher-growth stocks. But they also usually outperform the S&P 500 in bear markets, when the macro headwinds drive investors back toward safer, income-generating investments.
Utilities are well insulated from macro headwinds, since their customers won’t cut them off just to save a few dollars. Many utilities have also benefited from the breakneck expansion of the power-hungry cloud infrastructure and AI markets over the past few years.
Back in 2022, the S&P 500 experienced a peak-to-trough decline of 25% as the Fed raised its benchmark rates. But during that same period, VPU delivered a total return of 1%. So if you’re looking for a safe place to park your cash in this choppy market — while earning a decent 30-day SEC yield of 2.71% — VPU checks all the right boxes.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Constellation Energy, NextEra Energy, and Vanguard S&P 500 ETF. The Motley Fool recommends Duke Energy. The Motley Fool has a disclosure policy.
