Best Utilities ETFs for 2022

Learn More About the Best ETFs in This Sector, and Which to Buy Now

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If you want to buy the best utilities ETFs, look for income, growth, diversification, or some combination of those objectives. Utilities stocks tend to pay above-average dividends. They have good long-term returns. They also, can outperform the market during times of volatility. This is why exchange-traded funds (ETFs) that invest in utilities can be useful tools.

What Are Utilities ETFs?

Utilities ETFs passively track a benchmark utilities index that may include electric companies, water utilities, gas companies, and energy traders. Large, publicly traded U.S. utilities include NextEra Energy (NEE), Duke Energy Corp. (DUK), Dominion Energy Inc., and Southern Co. (SO). 

Utilities ETFs can be used as defensive holdings in a declining market, which investors now face as a result of challenging economic conditions. This is because, even in difficult times, people still need basic utilities services, such as water and electricity.

What Are the Benefits?

There are three primary benefits of investing in utilities ETFs:

  1. Low expenses: Because they are passively managed, the expense ratios for ETFs in general tend to be much lower than actively managed mutual funds. This gives investors wanting to invest in stocks in the utilities sector a convenient, low-cost, diversified means of gaining exposure to those stocks.
  2. Income from dividends: Utilities stocks often pay higher dividends than stocks in other sectors. This makes utilities ETFs attractive to retail, or consumer, investors, especially retired people who want income from their investments.
  3. Diversification: Sector funds are often used as tools to add exposure to a certain area of the market that an investor's portfolio may lack. Utilities stocks are defensive in nature because as a rule they do not suffer price declines as severe as aggressive stocks in a bear market. 

What To Look for in the Best Funds

If you seek income,, look at the SEC yield of utilities ETFs before buying. This yield is based on the 30-day period ending on the last day of the previous month. The yield figure reflects the dividends and interest earned during the period, after the deduction of the fund's expenses. Funds must report this number to the Securities and Exchange Commission (SEC). 

To find the best utilities ETFs, most investors are wise to look for a combination of yield and low expenses. 

While performance is a factor, ETFs are passively managed. Results will closely mirror the benchmark index. This means long-term returns come second to other considerations.

Best Utilities ETFs for This Year and Beyond

The best utilities ETFs will have a combination of high yield and low expenses. Also, when buying ETFs in general, it's wise to look for funds that have a long history and a large asset base. This provides a good record of the fund's ability to track its index, and the high relative assets under management (AUM) allow for greater liquidity.

With these qualities in mind, here are three of the best utilities ETFs to buy this year:

  1. Vanguard Utilities ETF (VPU): If you're looking for a solid combination of yield and low expenses, VPU is a great choice. VPU tracks the MSCI US IMI Utilities Index, which consists of about 70 U.S. utilities stocks, such as NextEra Energy and Duke Energy. The current yield (as of Dec. 10, 2021) is 3.0%. The expense ratio is 0.10%, or $10 for every $10,000 invested.
  2. Utilities Select Sector SPDR (XLU): With $10 billion under management, XLU is the largest ETF, as measured by assets. The target benchmark for XLU is the Utilities Select Sector Index. It includes many of the same holdings as VPU and other utilities ETFs, but a bit more focused at 28 holdings. The 30-day yield (as of Dec. 11, 2021) for XLU is 2.93% . The expense ratio is 0.12%.
  3. Fidelity MSCI Utilities Index (FUTY): If low expenses are your priority, you'll like what you see in FUTY. It has an expense ratio of 0.08%, or $8 for every $10,000 invested. Like Vanguard's VPU, FUTY tracks the MSCI US IMI Utilities Index, which comprises 70 U.S. utilities stocks. The 30-day yield for FUTY is 2.94% (as of Dec. 10, 2021).

The Bottom Line

Utilities ETFs can be a smart way to add income-producing stocks to a portfolio. The utilities sector is seen as defensive, and therefore a good hold in a down market cycle. While also a relatively stable growth investment, it may not be right for you. As with other concentrated funds that focus on a single sector, it's wise not to allocate all your assets to just one fund. 

The Balance does not provide tax, investment, or financial services or advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.