Buying exchange traded funds (ETFs) that track the S&P 500 index is a great way to create long-term wealth. Statistics show that roughly 90% of actively managed funds have failed to beat the index over the past 15 years. By simply buying the index, you can boost your performance into the top 10% of the industry.
But there’s one ETF that can further improve your portfolio’s performance.
This might be my favorite ETF
Few ETFs can match the power of ETFs tracking the S&P 500 in long-term performance. However, there are market cycles where certain ETFs can outperform their indexes. These cycles can last for years. Bear markets are where the S&P 500 struggles the most. The index is always fully invested in the stock market. So when the stock market crashes, the index has nowhere to run.
But not all companies struggle during market downturns. In fact, some companies’ stock prices even rise during bear markets. One of the safest sectors to survive a market crash is the utilities sector. Fool contributor Matthew DiLallo explains:
Utility stocks are generally stable investments. Demand for utility services, such as electricity, natural gas, and water, tends to be stable, even during economic downturns. Meanwhile, the rates charged for providing these services are either regulated (approved by a government agency) or contractually guaranteed (unregulated), allowing utility companies to generate stable revenues and pay dividends with above-average yields.
There are many ETFs that invest primarily in utility stocks, but few can match the performance and low fees of the Vanguard Utilities Index Fund ETF (NYSEMKT: VPU).
2 Reasons This Utility ETF is Great
Before we explain why the Vanguard Utility ETF can give your portfolio a much-needed boost during a downturn, let’s first talk fees. One of the biggest reasons actively managed funds fail to beat the index is high fees. Not this ETF. The fund’s fees are just 0.1% per year, while comparable funds average about 1% per year. Holding 99.9% of your money every year makes a big difference in the long run compared to holding only 99%.
Excluding fees, this ETF’s performance should be the most promising.The Vanguard Utilities ETF has a long-standing track record of outperforming the S&P 500 during market downturns. When the S&P 500 lost 18.1% of its value in 2022, this ETF actually gained 1.1% of its value. Similarly, in 2018, when the S&P 500 lost 4.4% of its value, the Vanguard Utilities ETF gained 4.4%.
The story continues
But it’s not all good with this ETF. The same attributes that make the Vanguard Utilities ETF attractive during market downturns also turn into weaknesses in a strong bull market like the current one. For example, last year the S&P 500 rose 26%. But the Vanguard Utilities ETF fell 7.5%.
This is not an ETF you want to hold in place of the S&P 500 ETF over the long term. However, it is an ideal choice for those looking to reduce market risk, such as those on a fixed income or those worried about the next bear market. If you want to reduce risk without getting out of the market completely, this is the ETF for you.
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Ryan Vanzo has no investment in any of the stocks mentioned. The Motley Fool has no investment in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Forget the S&P 500 and buy this awesome ETF instead. This was originally published by The Motley Fool.