A quick break from information technology and consumer discretionary
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Over the past couple of months, the main market talk has been about information technology companies such as Microsoft and Apple and consumer discretionary companies such as Amazon and Home Depot. Common information technology ETFs include the Vanguard Information Technology ETF (VGT) and the SPDR Technology Select ETF (XLK). Common consumer discretionary ETFs include the Vanguard Consumer Discretionary ETF (VCR) and the SPDR Consumer Discretionary Select ETF (XLY).
Why does no one seem to care about utilities? That has slightly changed over the past week. On August 12th, 2020, the S&P 500 closed shy of its all-time high. The index has rebounded 50% since hitting a low in March. Utilities and consumer staples led the recent rally on August 12th. The focus here will be on utilities, which seems to be one of the more forgotten Global Industry Classification Standard (GICS) sectors even though utility companies provide necessities such as water, sewage, electricity, and natural gas.
The following are 2 utilities ETFs you should know about: Vanguard Utilities ETF (VPU) and SPDR Utilities Select ETF (XLU). Both track the performance of similar companies, but there are slight differences between the two that may sway an investor in choosing one over the other.
1. Vanguard Utilities ETF (VPU)
VPU tracks the performance of the MSCI US IMI Utilities 25/50 Index, which is an index made up of large, mid, and small utility companies in the United States. As of the market close on August 14th, 2020, the price of VPU was $132.08, and its expense ratio was 0.10%.
VPU was incepted on January 26th, 2004. Since its inception, the ETF has provided a total return of approximately 356% and an average annual total return of approximately 10% with dividends reinvested. The top 3 holdings in VPU are NextEra Energy, Dominion Energy, and Duke Energy.
2. SPDR Utilities Select ETF (XLU)
XLU tracks the performance of the Utilities Select Sector Index, which is an index that seeks to provide an effective representation of the utility sector of the S&P 500. As of the market close on August 14th, 2020, the price of XLU was $60.38, and its expense ratio was 0.13%.
XLU was incepted on December 16th, 1998. Since its inception, the ETF has provided a total return of approximately 313% and an average annual total return of approximately 7% with dividends reinvested. The top 3 holdings in XLU are NextEra Energy, Dominion Energy, and Duke Energy.
As you can see, VPU and XLU are pretty similar. It comes down to your preference, research, and due diligence as an investor to decide if you will invest in either. You can also utilize either of these ETFs for research purposes so that you can determine on what utility companies you would like to add to your portfolio.
Electricity companies dominate the top holdings of VPU and XLU. That is no surprise because private-sector companies, which are companies not under the direct control of a government, provide the bulk of electric generation, transmission, and distribution in the United States.
It is important to know about each GICS sector, and utilities are an important one that is sometimes forgotten. Most companies in the sector have predictable cash flow and profits, which is positive for an individual wanting to add dividend-paying companies to their portfolio. As stated earlier, you can utilize ETFs such as VPU and XLU to ease your research process to set yourself and your portfolio up for long-term financial success.
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