President Donald Trump has imposed a 20% tariff on imports from China and a 25% tariff on imports from Canada and Mexico. He has also mentioned applying a 25% tariff on imports from Europe. All impacted countries have either taken or plan to take retaliatory action, and Trump has already threatened reciprocal retaliation.
The nonpartisan Tax Foundation estimates that the tariffs proposed by President Trump will raise the average tax on U.S. imports to 13.8%, the highest level since 1939. As a result, the stock market has faced turbulence. From their highs, the S&P 500 has fallen 6% and the Nasdaq Composite has declined 9%.
The utilities sector could benefit (or at least incur less damage) compared to other stock market sectors as the trade war weighs on the broader stock market. This scenario makes the Vanguard Utilities ETF a compelling investment idea right now. In January, JPMorgan Chase strategists led by Thomas Kennedy noted that “the net impact of the tariffs and the implications of the administration’s policy goals are likely to benefit the utilities sector where infrastructure buildout will be required.
Additionally, tariffs should theoretically reduce demand for foreign imports, curbing demand for foreign currency.
The Federal Reserve may also raise interest rates to combat tariff-induced inflation, which would incentivize foreign investors to buy U.S. bonds, increasing demand for U.S. currency. Utilities-sector companies derive less than 1% of their revenue from international markets, so they have virtually zero exposure to foreign-currency headwinds. For context, international-revenue exposure in other stock market sectors ranges from 18% in real estate to 56% in technology.
Utility stocks may remain unscathed by tariffs because most of their revenue comes from the U.S. They may even benefit from tariffs as the reduction in imported goods may lead to greater domestic manufacturing activity, creating demand for electricity, gas, and water.
Appeal of utilities amid tariffs
The Vanguard Utilities ETF tracks 69 U.S. companies in the utilities sector.
The index fund is most heavily weighted toward electric utilities (61%) and multi-utility companies (25%). It also provides exposure to independent power producers (6%), gas utilities (5%), and water utilities (3%). The five largest holdings in the Vanguard Utilities ETF are NextEra Energy, Constellation Energy, Southern Company, and Duke Energy.
Beyond tariffs, companies in the utilities sector have another tailwind in the growing demand for data centers. On average, AI requires 10 times more electricity per query than traditional internet search engines. Consequently, Goldman Sachs strategists anticipate electricity demand will accelerate “through the end of the decade to levels not seen in 20+ years.”
While the Vanguard Utilities ETF returned just 21% during the last three years, which falls short of the 40% return of the S&P 500, the utilities sector is well-positioned to outperform the broader market in the next three years.
Utilities companies, in aggregate, reported earnings growth of 16% in the fourth quarter. This makes the sector-level valuation of 20 times earnings look reasonable. And the Vanguard Utilities ETF has a cheap expense ratio of 0.09%, so shareholders will pay only $9 per year on every $10,000 invested in the fund.
I have only one caveat: I would keep my position in the Vanguard Utilities ETF small. While I believe it’s the best Vanguard index fund (or at least one of the best) to buy as tariffs hit the stock market, I also think the technology sector will outperform the utilities sector over the next decade. I would use tariff-driven selling to build positions in technology stocks, too.
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