Boring Beats Brilliant: How a Utilities ETF Has Quietly Trounced the S & P 500 in Nearly Every Recession This Century

Although the US economy has not undergone a genuine depression since the first part of the 20th century under Presidents Herbert Hoover and Franklin D. Roosevelt, the less severe recession has emerged numerous four times since 2000:

• 2001: The Dot-com bubble crash
• 2007-2008: The subprime mortgage banking meltdown
• 2020: The Covid-19 pandemic 
• 2022: “Technical” recession (2 consecutive quarters of negative GDP growth) 

During these economically turbulent periods, the S&P 500 took its lumps as well, and struggled to keep its head above water. Defensive stocks, which are defined as those supplying indispensable goods and services regardless of economic climate, such as utilities, food, personal care products, and medicines, often hold their own and even eke out decent gains during recessionary times. A number of them, such as Walmart, Procter & Gamble, and Con Edison, are in the S&P 500 and played a role in its resilience. 

However, there is a relatively humdrum ETF that has soundly outperformed the S&P 500 during the last 2 of 3 recessions this century, (it didn’t start until 2004): the Vanguard Utilities Index Fund ETF Shares (NYSE: VPU | VPU Price Prediction). 

Vanguard Utilities Index Fund ETF Shares

Due to their indispensibility, water, electric and gas utilities are staples of the defensive stocks sector.

Conceived of to track the MSCI US Investable Market Utilities 25/50 Index, VPU’s inception date was January 26, 2004. It is passively managed, and holds over 99.2% utilities stocks with the remainder either energy or industrials. The utilities stocks are from the electric, water, gas, or nuclear industries. The total number of stocks held at the time of this writing is 67. 

As one might expect, the growth factor is a lower priority for these industries than consistency, reliability, and minimal volatility. As a result, investors in VPU appreciate and rate these factors to be of greater importance:

• Cash-Flow Stability: Utilities are essential services, so water and electricity demands are constant (although the recent proliferation of A.I. data centers is escalating both utilities of late in certain municipalities)
• Dividend Yield: VPU’s solid 2.52% dividend yield has not fluctuated appreciably. In the past 5 years, the low payout per share in a single quarter has been $0.95 and the high has been $1.33. VPU’s overall dividend growth rate is 0.67% and its annual dividend is $5.09/share. 
• Minimal Competition: Most of the utilities are in a monopolistic relationship with the municipalities they serve, so there is no competitor to speak of for the vast majority. 

Beating the S&P 500 During Recessions

During recessions, VPU has outpaced the S&P 500 on multiple occasions since 2007.

Although VPU’s gains will never rival those of the Magnificent 7 stocks, which have fueled the bull run of the S&P 500 for the past few years, it does have one claim to fame to hang its hat on:

During the past three recessions, VPU has beaten the S&P 500 when the latter declined. 

While all markets were rocked by the 2007-2008 subprime mortgage banking meltdown, the S&P 500 took it especially hard: its 2007 return was a meagre +3.53%, while 2008 was a disaster: -38.49%. By contrast, VPU returned +17% in 2007 and although it also fell in 2008, its -27.94% was still nearly 10% better.

The Covid-19 pandemic in 2019-2020 hit all of the markets extremely hard. The S&P 500 still ended in the black although it had started to fall in 2019 and closed out at +28.88%, while in Q1 2020, the S&P 500 fell as much as 35% in a month. However, it managed to bounce back once the pandemic showed to not be as deadly as the media projected, and ended 2020 +16.26. During that same period, VPU closed 2019 at +24.87%, an unusual gain as a result of funds switching to the defensive sector out of uncertainty. Those funds returned to the S&P 500 in 2020, closing VPU nearly flat at -0.76%.

2022 saw the S&P 500 take a savage body blow, ending the year at -19.44%, while VPU remained resilient and eked out a a gain into the black at +1.04%.

Given that A.I. data centers consume gargantuan amounts of electricity and water for their operation, their demands on the electrical grids and water supplies for many cities are bound to escalate, resulting in unexpected growth, stronger earnings, and increased dividends from many of these utilities. Investors seeking steady growth with a track record of defensive volatility protection relative to the S&P 500 could do worse.