Most investors dream of an investment that can deliver gains in both bull and bear markets. At minimum, it would be ideal to take advantage of the majority of the stock market’s upward swings while mitigating downward exposure during corrections.
If this sounds like a compelling combination, you should strongly consider my favorite Vanguard exchange-traded fund (ETF) for 2026: the Vanguard Utilities Index Fund ETF (NYSEMKT: VPU). There are two reasons in particular that it could be a huge winner this year.
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I’m a huge fan of growth stocks with big upside potential. The unfortunate news is that the vast majority of promising growth stocks are trading at relatively high valuations right now. In fact, the entire stock market is trading at a nosebleed levels.
At least that’s the case when looking at broad stock market indexes. The S&P 500, for example, currently trades at a price-to-earnings ratio (P/E) of around 30 — its highest valuation in years.
When stock markets are expensive, there can often be nowhere to hide. Utilities, however — the businesses that the Vanguard Utilities Index Fund exclusively invests in — look like relative bargains. The utility stocks in this Vanguard fund trade at an average P/E of just 21. That’s around 30% cheaper than the S&P 500 overall.
To be fair, utilities have long traded at a historical discount to the market. These stocks typically show far slower growth than other types of businesses, especially exciting sectors like artificial intelligence. And right now, utility stocks are also historically expensive. In past market peaks, the utility sector traded at just 17 times earnings — roughly a 20% discount to today’s levels.
Given their lower growth, utility stocks can also struggle in bull markets. It’s not that these stocks don’t gain value in upward markets; for the most part, they do. It’s just that the upside potential is typically less. After all, utility businesses specialize in things like electricity, water, and natural gas distribution. When markets spike, demand for these services usually doesn’t spike in tandem.
But here’s the thing: In downward markets, these stocks typically shine. That’s because when markets dip, demand for utility services typically doesn’t fall nearly as much, if at all. So when markets are historically expensive, investing in utility stocks can greatly protect your portfolio’s downside without sacrificing upside potential. While we can’t know the future, I’m betting the same downside protection will prove true during the next market downturn, even if that downside protection is partially blunted by the sector’s historically high valuation. According to research from Fidelity, “Historically, utilities have displayed the least economic sensitivity among the 11 equity market sectors, as well as having low beta.”
