Utility ETFs Back In The Spotlight As VPU Hits 52-Week High

While market volatility bubbles and macro uncertainty persists, investors are finding themselves once again besotted with a timeless safe haven: utilities. The Vanguard Utilities ETF (NYSE:VPU) has surged into a new 52-week high, up nearly 20% from its one-year trough, and reinvigorated interest in the broader utilities ETF universe.

The rally occurs as economic data sends mixed signals, rate cut speculation mounts, and investors become increasingly skittish about high-multiple technology trades. Against this backdrop, the utility case is shining brighter, and VPU’s performance is highlighting why.

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Why VPU Is Outperforming

VPU tracks the MSCI US Investable Market Utilities 25/50 Index, providing exposure to U.S. utilities of varying market capitalizations, at a low annual fee of 0.09%. The fund’s low beta (volatility in comparison to the market) makes it attractive during turbulent times. The fund has a beta of 0.58 according to Benzinga Pro.

Furthermore, most of its components provide stable dividends, which are becoming increasingly enticing as interest rate reductions are on the horizon.

And how can we forget the immense power required to support AI datacenters, which has made the utility sector an unsung hero in today’s world.

However, it’s not only the flight to safety that drives VPU. Underneath, it’s holding stocks that analysts at Morningstar believe are undervalued and stand to gain from a possible re-rating.

The Stock-Level Spark: Undervalued Utilities Within

Multiple utility stocks that VPU holds in its top 30 continue to trade below fair value, though, despite the run-up in the ETF, according to Morningstar. These include:

• Edison International (NYSE:EIX) — riding regulatory tailwinds and wildfire mitigating investments
• PG&E (NYSE:PCG) — recovering from prior legal issues and a turnaround story
• Essential Utilities (NYSE:WTRG) — providing water and wastewater exposure with growth upside
• Eversource Energy (ES) — with renewable energy investments set up for a future-proof portfolio

These stocks offer a mix of income, defensive qualities, and, in the opinion of some, discount valuations, providing stock-level tailwinds to VPU’s overall argument.

“We forecast Edison will invest nearly $8 billion annually for at least the next five years, resulting in 7% annual earnings growth off 2024 earnings, excluding one-time fire-related impacts,” a senior Morningstar analyst said about EIX.

Moreover, the research firm believes PG&E is 27% undervalued presently.

How Does VPU Compare To XLU?

While VPU is making headlines with its 52-week peak, it’s not alone among utilities ETFs. The Utilities Select Sector SPDR Fund (NYSE:XLU), which invests in a narrower universe consisting of large-cap names, is also riding near its 52-week high. But VPU’s wider coverage (mid- and small-cap utilities as well) and lower expense ratio may prove beneficial for cost-focused or diversification-driven investors.

That being said, XLU’s greater exposure to dividend-paying giants such as NextEra Energy (NYSE:NEE) and Duke Energy (NYSE:DUK) would make it more attractive to income-hungry investors.

Macro Tailwinds

VPU’s rally is against a backdrop that is designed for utilities:

• Rate Cut Expectations: Declining bond yields and increasing hopes of Fed rate cuts make dividend-paying groups such as utilities relatively more appealing.
• Policy and Trade Uncertainty: As voting, geopolitical stress, and shifting trade patterns come to the forefront, low-volatility areas with controlled revenue streams attract attention.
• Volatility Fatigue: Investors tired of tech-fueled swings are rotating into areas that provide calmer seas.

Bottom Line: Is There More Juice Left?

With a strong weighted alpha of 16.4 (according to Barchart.com), momentum indicators indicate VPU’s advance can keep going, particularly if macro conditions remain volatile. The fund is not only enjoying defensive flows; it’s supported by fundamentally sound and cheap names that still have some legs left.

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