The rising probability of aggressive interest rate hikes to curb inflation and intensifying geopolitical strife are wreaking havoc on the stock market. Investor sentiment has been dampened significantly over the past few weeks. The bearish sentiment measure by the American Association of Individual Investors has recorded a reading of 59.4%, the highest since March 2009. Moreover, former Fed vice chair Roger Ferguson recently conceded that “A recession at this stage is almost inevitable.”
Amid such bearish sentiment, the utility industry could help investors cushion their portfolios because relatively inelastic demand for electricity, water, and natural gas help companies in this space perform steadily irrespective of market or economic conditions. Furthermore, the dividend pay-outs of utility companies could help generate a steady income stream.
Given this backdrop, we think betting on quality ETFs Utilities Select Sector SPDR ETF (XLU) and Vanguard Utilities ETF (VPU) could be safer to protect your portfolio from a bear market.
Utilities Select Sector SPDR ETF (XLU)
With $15.61 billion in assets under management (AUM), XLU’s top holdings include NextEra Energy, Inc. (NEE), with a 13.91% weighting, followed by Duke Energy Corporation (DUK) at 8.44%, and Southern Company (SO) at 7.73%. It currently has 30 holdings in total. Over the past month, the ETF’s net inflows were $982.60 million. In addition, its 0.10% expense ratio compares favorably to the 0.43% category average.
XLU pays a $2.01 annual dividend, which yields 2.85% at the prevailing price. Its four-year dividend yield stands at 3.11%. Its dividends have increased at 3.7% CAGR over the past five years. Over the past year, the fund has gained 5.7%.
It is no surprise that XLU has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. In addition, it has an A grade for Trade and a B grade for Buy and Hold.
XLU is ranked #3 of 13 ETFs in the Utility ETFs group. Click here to see all the XLU ratings.
Vanguard Utilities ETF (VPU)
VPU offers exposure to the domestic utility sector with low volatility or low risk and high dividend yields. It is more appealing to investors looking to establish a shorter-term tactical tilt or make a sector rotation play.
NEE has a 13.80% weighting in the fund as its top holding, followed by DUK at 7.13% and SO at 6.38%. VPU has $6.26 billion in AUM. It has 66 holdings in total. Its net inflows came in at…
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