The Vanguard Utilities Index Fund ETF (VPU) and State Street’s The Utilities Select Sector SPDR Fund (XLU) are two of the largest utilities sector ETFs and two of the most popular among individual investors. Many investors compare VPU vs XLU because they are so similar. The funds are quite similar with one important difference.
A quick reminder that this site does NOT provide investment recommendations. Fund comparisons (such as this one) are not conducted to identify the “best” fund (since that will vary from investor to investor based on investor-specific factors). Rather, these fund comparison posts are designed to identify and distinguish between the fund details that matter versus the ones that don’t.
The Short Answer
The primary difference between the funds is that XLU is a large-cap and mid-cap fund, while VPU includes more small-caps. Despite this difference, risk and return has been identical and I consider these two funds identical and interchangeable. This conclusion is quite similar to the conclusion when comparing VPU vs FUTY (Fidelity’s utilities ETF).
The Longer Answer
Historical Performance: VPU vs XLU
XLU was launched back in 1998, while VPU was launched in 2004. Since the VPU’s launch, the two funds have performed identically, with an annualized difference of only .03%!
Portfolio Exposures: VPU vs XLU
XLU tracks the Utilities Select Sector Index, which is essentially a sub-index of the S&P 500 (which is predominantly composed of large-caps). It has changed over the years, but the index that VPU currently tracks is includes more mid-caps and small-caps.
Geographic Exposure
Both VPU and XLU hold essentially 100% stocks, so I will not dig into country exposures or market classification here. For all intents and purposes, the two funds have identical geographic exposures.
Market Cap Exposure
As the below data illustrates, XLU primarily holds large-caps and mid-caps, while VPU is a bit more diversified in terms of market cap. Despite this difference, both funds are market-cap weighted and risk/return is overwhelmingly driven by the large-cap exposure.
| XLU | VPU | |
| Large Cap | 49% | 44% |
| Mid Cap | 51% | 47% |
| Small Cap | 0% | 8% |
Sector Exposure
VPU and XLU are Utilities ETFs and so their holdings are 100% Utilities stocks.
Practical Factors: VPU vs XLU
Transaction Costs
As ETFs, both XLU and VPU are free to trade on many platforms. Bid-ask spreads for both VPU and XLU are extremely low and volume is sufficient to prevent most individual investors from “moving the market.” Investors looking for a mutual funds, should read about VPU and VUIAX (VPU’s mutual fund share class).
Expenses
The expense ratio for both XLU and VPU is .10%. At these low levels of expense ratios, small differences in expense ratios does not typically matter anyways. Something to keep in mind if one fund or the other decides to reduce fees.
Tax Efficiency & Capital Gain Distributions
VPU has never made a capital gain distribution and XLU has not made one since 2000. I do not expect either fund to make capital gains distributions moving forward. In my opinion, these two funds are equally tax-efficient.
Options Strategies
The one factor that may sway someone towards XLU is if they are managing some type of option strategy, such as covered calls. The options market for XLU is much more active than for VPU. Of course, if someone wants to trade options without triggering tax consequences in another part of their portfolio, perhaps VPU is the better pick for the non-option holding.
Bottom Line: VPU vs XLU
VPU and XLU are identical in nearly every way and I would not spend any time comparing them or trying to decide which is better. I believe investors’ time is better spent evaluating and thinking through more material decisions.
