Vanguard Utilities Index: Too Risky?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Van
Posts: 759
Joined: Wed Oct 27, 2010 9:24 am

Vanguard Utilities Index: Too Risky?

Post by Van »

Like a lot of folks I'm looking for some decent yield. This fund currently has a SEC yield of 3.54%, but Vanguard gives it the highest risk rating of 5. I think that risk rating is mainly because it is a narrow sector and not more diverse. But, man, it's utilities. What do you think? Do you have any hands on experience with this fund to back up your opinion?
dukeblue219
Posts: 837
Joined: Fri Jan 29, 2016 12:40 pm

Re: Vanguard Utilities Index: Too Risky?

Post by dukeblue219 »

Are you looking for yield or return? I own a little XLU (utilities ETF) but honestly, it's pretty volatile. Just look at the charts from March. Its not like utilities stayed flat and paid their dividend while the S&P tanked, unfortunately.
Topic Author
Van
Posts: 759
Joined: Wed Oct 27, 2010 9:24 am

Re: Vanguard Utilities Index: Too Risky?

Post by Van »

Mostly yield right now because my usual yield plays (CDs etc.) are near zero.
RocketShipTech
Posts: 679
Joined: Sat Jun 13, 2020 10:08 pm

Re: Vanguard Utilities Index: Too Risky?

Post by RocketShipTech »

The standard Boglehead answer is to invest for total return, not dividends.

The answer you are looking for is preferred stock, not utilities. PFF is yielding 5.1% right now
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: Vanguard Utilities Index: Too Risky?

Post by dbr »

Buying a risky stock fund to get yield makes no sense. A stock fund is not a replacement for a bond fund.

But this is the same old comment about return, which is meaningful, and yield, which is not.

I am not big on backtesting, but for what it is worth VLU has had lower return and more risk than the total stock market since inception in 2013. In a different time period results could be different, but a person would have to have some detailed understanding for why they would invest in a sector like this rather than the total market. Yield is not that reason.
Topic Author
Van
Posts: 759
Joined: Wed Oct 27, 2010 9:24 am

Re: Vanguard Utilities Index: Too Risky?

Post by Van »

RocketShipTech wrote: Mon Jul 20, 2020 7:06 pm The standard Boglehead answer is to invest for total return, not dividends.

The answer you are looking for is preferred stock, not utilities. PFF is yielding 5.1% right now
I'm not very knowledgeable about preferred stocks. How different is a fund comprised of utilities compared to a fund of preferred stocks. The later would be more diversified I assume, but it seems that the standard argument of a high yielding utilities fund not being a substitute for a bond fund would also apply to the preferred stock fund.
RocketShipTech
Posts: 679
Joined: Sat Jun 13, 2020 10:08 pm

Re: Vanguard Utilities Index: Too Risky?

Post by RocketShipTech »

Van wrote: Mon Jul 20, 2020 7:30 pm
RocketShipTech wrote: Mon Jul 20, 2020 7:06 pm The standard Boglehead answer is to invest for total return, not dividends.

The answer you are looking for is preferred stock, not utilities. PFF is yielding 5.1% right now
I'm not very knowledgeable about preferred stocks. How different is a fund comprised of utilities compared to a fund of preferred stocks. The later would be more diversified I assume, but it seems that the standard argument of a high yielding utilities fund not being a substitute for a bond fund would also apply to the preferred stock fund.
A preferred stock fund is closer in nature to a bond fund than any common stock fund is to a bond fund.

If you are looking for yield then it is a feasible option. If you are changing your mind that investing for yield is a good idea, then that is a different discussion.
User avatar
Taylor Larimore
Advisory Board
Posts: 29960
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Vanguard Utilities Index: Too Risky?

Post by Taylor Larimore »

Van wrote: Mon Jul 20, 2020 6:40 pm Like a lot of folks I'm looking for some decent yield. This fund currently has a SEC yield of 3.54%, but Vanguard gives it the highest risk rating of 5. I think that risk rating is mainly because it is a narrow sector and not more diverse. But, man, it's utilities. What do you think? Do you have any hands on experience with this fund to back up your opinion?
Van:

In my opinion it is usually a mistake to pick sector funds especially for their taxable yield.

We once owned this fund -- until I learned the many benefits of total market index funds -- which already hold the market weight in Utilities. You may find this article helpful:

Which is more important - dividend yield or total return?

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- "Never think you know more than the market. Nobody does."
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
vineviz
Posts: 7832
Joined: Tue May 15, 2018 1:55 pm

Re: Vanguard Utilities Index: Too Risky?

Post by vineviz »

dbr wrote: Mon Jul 20, 2020 7:13 pm Buying a risky stock fund to get yield makes no sense. A stock fund is not a replacement for a bond fund.

But this is the same old comment about return, which is meaningful, and yield, which is not.

I am not big on backtesting, but for what it is worth VLU has had lower return and more risk than the total stock market since inception in 2013. In a different time period results could be different, but a person would have to have some detailed understanding for why they would invest in a sector like this rather than the total market. Yield is not that reason.
VLU is a different fund than the OP was asking about. The correct fund is Vanguard Utilities ETF (VPU).

I personally overweight utilities, but using small and mid cap stocks instead of large caps. My view is that overweighting the sector improves the diversification of a US stock portfolio, and given the heavily regulated nature of the industry I think up to 20% or 25% of the US stock portfolio in utilities would be prudent. VPU is probably the best utility sector fund out there because of the index it tracks, with the Fidelity fund (FUTY) a close second.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
arcticpineapplecorp.
Posts: 6191
Joined: Tue Mar 06, 2012 9:22 pm

Re: Vanguard Utilities Index: Too Risky?

Post by arcticpineapplecorp. »

Van wrote: Mon Jul 20, 2020 7:03 pm Mostly yield right now because my usual yield plays (CDs etc.) are near zero.
the mistake you're making (has been alluded to already) is you're going to take money that is in CDs and use that to buy stocks. Do you see the problem?

Not only is a sector play too risky, you're taking money that you want to keep safe, and you're taking great risk with it, because stocks are riskier than CDs.

It's been said that more money has been lost stretching for yield than at the end of a gun.

total return is what matters:
https://www.investopedia.com/terms/t/totalreturn.asp
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
tibbitts
Posts: 11916
Joined: Tue Feb 27, 2007 6:50 pm

Re: Vanguard Utilities Index: Too Risky?

Post by tibbitts »

Van wrote: Mon Jul 20, 2020 6:40 pm Like a lot of folks I'm looking for some decent yield. This fund currently has a SEC yield of 3.54%, but Vanguard gives it the highest risk rating of 5. I think that risk rating is mainly because it is a narrow sector and not more diverse. But, man, it's utilities. What do you think? Do you have any hands on experience with this fund to back up your opinion?
I don't own the fund, partly because of the hefty $100,000 minimum to invest (admiral vs. ETF.) But I was somewhat surprised and disappointed by the performance this year. I would have thought it would have held up better, but it (and utilities in general) didn't.

I think you're way off base using this as a bond fund substitute. You're going beyond stretching for yield here. Stretching would be moving from higher to lower-rated bonds, not buying equities in their place.
rgs92
Posts: 2773
Joined: Mon Mar 02, 2009 8:00 pm

Re: Vanguard Utilities Index: Too Risky?

Post by rgs92 »

The Utility sector is not a good bond proxy. The S&P Utility Index ETF (XLU) dropped about 35% in the financial crisis, while BND (Vanguard Total Bond Market ETF) only dropped a few percent, and over the last 15 years dropped less than half what XLU dropped from any particular peak.
And also, when stocks go down, they often take utilities down with them.
So utilities are much more volatile (a.k.a. risky) than bonds and are also more correlated with stocks than bonds.
Topic Author
Van
Posts: 759
Joined: Wed Oct 27, 2010 9:24 am

Re: Vanguard Utilities Index: Too Risky?

Post by Van »

It seems unanimous so far. The Vanguard Utilities Index is deemed to be a poor choice for seeking yield in this low interest environment. It is too volatile and has the risk associated with stocks rather than bonds.

Thanks to everyone who took the time to respond.
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: Vanguard Utilities Index: Too Risky?

Post by dbr »

vineviz wrote: Mon Jul 20, 2020 8:07 pm
dbr wrote: Mon Jul 20, 2020 7:13 pm Buying a risky stock fund to get yield makes no sense. A stock fund is not a replacement for a bond fund.

But this is the same old comment about return, which is meaningful, and yield, which is not.

I am not big on backtesting, but for what it is worth VLU has had lower return and more risk than the total stock market since inception in 2013. In a different time period results could be different, but a person would have to have some detailed understanding for why they would invest in a sector like this rather than the total market. Yield is not that reason.
VLU is a different fund than the OP was asking about. The correct fund is Vanguard Utilities ETF (VPU).

I personally overweight utilities, but using small and mid cap stocks instead of large caps. My view is that overweighting the sector improves the diversification of a US stock portfolio, and given the heavily regulated nature of the industry I think up to 20% or 25% of the US stock portfolio in utilities would be prudent. VPU is probably the best utility sector fund out there because of the index it tracks, with the Fidelity fund (FUTY) a close second.
OOPS But the comment about not fleeing to stocks to solve a problem in bonds still stands.
User avatar
vineviz
Posts: 7832
Joined: Tue May 15, 2018 1:55 pm

Re: Vanguard Utilities Index: Too Risky?

Post by vineviz »

dbr wrote: Tue Jul 21, 2020 7:20 am
OOPS But the comment about not fleeing to stocks to solve a problem in bonds still stands.
True, and I meant to include an agreement with that point in my post.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
User avatar
patrick013
Posts: 3018
Joined: Mon Jul 13, 2015 7:49 pm

Re: Vanguard Utilities Index: Too Risky?

Post by patrick013 »

Utilities are not a growth investment primarily although they
can grow. Mostly for stability, yield, and low beta. VG is
rating them too high for risk IMO as they are a domestic
necessity and index selected. Dividends have increased
bear market or not.

Preferred stock funds are mostly BBB rated so there is risk
there. SPYD is yielding over 6%. Malkiel would probably
like that for a tilt against bonds not TSM.
age in bonds, buy-and-hold, 10 year business cycle
User avatar
abuss368
Posts: 21601
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Vanguard Utilities Index: Too Risky?

Post by abuss368 »

Van wrote: Mon Jul 20, 2020 6:40 pm Like a lot of folks I'm looking for some decent yield. This fund currently has a SEC yield of 3.54%, but Vanguard gives it the highest risk rating of 5. I think that risk rating is mainly because it is a narrow sector and not more diverse. But, man, it's utilities. What do you think? Do you have any hands on experience with this fund to back up your opinion?
Jack Bogle has said that most investors could go their entire lifetime without the need for a sector fund.

Don’t search for the needle in the haystack. Own the haystack.
John C. Bogle: “Simplicity is the master key to financial success."
rossington
Posts: 773
Joined: Fri Jun 07, 2019 2:00 am
Location: Florida

Re: Vanguard Utilities Index: Too Risky?

Post by rossington »

dbr wrote: Tue Jul 21, 2020 7:20 am
But the comment about not fleeing to stocks to solve a problem in bonds still stands.
With all due respect take another look. Go to Portfolio Visualizer.

It looks to me that VPU has way outperformed as a surrogate for bonds at least since 2010.(60% VTSAX/40% VPU) vs.(60% VTSAX/40%VBTLX).

100% VTSAX (Best return/Highest volatility), 60% VTSAX/40% VPU (Next best return/Lower volatility), 60% VTSAX/40% VBTLX (Lowest return/Lowest Volatility).

These are mostly high quality utilities that VPU is invested in: https://investor.vanguard.com/etf/profi ... -holdings

The question we have to ask is if one goes 60% VTSAX/40% VPU is one convincing himself that he is 100% stocks or 60% stocks and a 40% bond replacement with slightly higher risk for a higher reward?
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
Post Reply