Vanguard’s S&P 500 ETF (NYSEMKT: VOO), which passively tracks the S&P 500 (SNPINDEX: ^GSPC), 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 (NYSEMKT: VPU) 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 (NYSEMKT: XLU), 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%).
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.
