This ETF beats the S&P 500 across many market cycles.
Buying an exchange-traded fund (ETF) that tracks the S&P 500 index is a terrific method of generating long-term wealth. Statistics show that around 90% of actively managed funds failed to beat the index over the last 15 years. Simply buying the index allows you to catapult your performance into the top 10% of the industry.
But there’s one ETF that could improve your portfolio’s performance even more.
This could be my favorite ETF ever
For long-term performance, few ETFs can match the power of those that track the S&P 500. But there are market cycles in which certain ETFs can outperform that index. These cycles can last for years. Where the S&P 500 struggles most is during bear markets. The index is always fully invested in the stock market. So when stock markets tank, there’s nowhere for the index to hide.
But not all companies struggle during market downturns. In fact, some companies see their stock prices rise during bear markets. One of the safest places to be during a market crash is the utilities sector. As Fool contributor Matthew DiLallo explains:
Utility stocks typically make stable investments. Demand for utility services such as electricity, natural gas, and water distribution tends to remain steady, even during a recession. Meanwhile, the rates they charge for delivering these services are either regulated (approved by a government entity) or contractually guaranteed (non-regulated), so utilities generate reliable earnings, allowing them to pay dividends with above-average yields.
There are many ETFs to consider that invest primarily in utility stocks. But few match the performance and low fees of the Vanguard Utilities Index Fund ETF (VPU -0.01%).
2 reasons this utility ETF rocks
Before we get into why the Vanguard Utilities ETF can add much-needed juice to your portfolio during downturns, it’s important to start with fees. One of the biggest reasons actively managed funds fail to beat the index is that they charge high fees. Not so with this ETF. This fund charges you just 0.1% per year in fees, while comparable funds charge an average of around 1% per year. Keeping 99.9% of your money year to year can add up to huge differences over the long term versus keeping just 99%.
Apart from fees, its this ETF’s performance that should get you the most excited. The Vanguard Utilities ETF simply has a long track record of beating the S&P 500 when markets turn sour. In 2022, when the S&P 500 lost 18.1% of its value, this ETF actually gained 1.1% in value. Similarly, when the S&P 500 shed 4.4% of its value in 2018, the Vanguard Utilities ETF rose by 4.4%.
It’s not all upside with this ETF, however. The same attributes that make the Vanguard Utilities ETF attractive during market downturns turn into weaknesses during strong bull markets such as the one we’re in right now. Last year, for example, the S&P 500 rose 26%. But the Vanguard Utilities ETF lost 7.5%.
This isn’t an ETF you want to own instead of an S&P 500 ETF over the long term. Yet it’s an ideal choice for those looking to reduce market risk, such as those on a fixed income or who are simply worried about the next bear market. If you find yourself wanting to reduce risk without pulling out of the market entirely, this is the ETF for you.
Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
