This year has been a remarkable one for the stock market, with major indexes reaching new heights. However, Warren Buffett’s comments at Berkshire Hathaway’s annual shareholder meeting and changes to the company’s public equity holdings suggest that Berkshire is not aggressively buying into the current market. In fact, Berkshire has sold over $100 billion in stock this year and has accumulated a massive cash and Treasury bill position of over $300 billion. Despite this, Berkshire remains confident in the utility and energy sectors, as evidenced by its significant stakes in Chevron and Occidental Petroleum, as well as its decision to acquire the remaining 8% stake in Berkshire Hathaway Energy (BHE).
BHE is a vital component of Berkshire’s business, comprising various electric and gas utilities, pipelines, and other infrastructure assets. Its domestic regulated energy interests include four regulated US utility companies and five US integrated natural gas pipelines, among other assets. Unlike the exploration and production or refining side of oil and gas, the midstream oil and gas industry functions like a toll road, charging fees to move energy products across the country. Regulated utilities work with government agencies to set prices that are fair to consumers, allowing them to invest in more infrastructure and pay dividends to shareholders.
Investors can gain exposure to BHE by buying shares of Berkshire Hathaway. However, a simpler and more direct approach may be to invest in an exchange-traded fund (ETF) with broad-based exposure to the utility sector. The Vanguard Utilities ETF, for instance, mirrors the performance of the utility sector and has returned an impressive 27.8% year to date. With an expense ratio of just 0.1%, a minimum investment of $1, and a yield of 3%, this ETF offers a compelling way to tap into the utility sector.
While the sector has been a beacon of safety for value investors seeking passive income, its recent surge may have some wondering if it’s still a good buy. However, context is key. The utility sector was down slightly from 2020 through 2023, lagging the broader indexes by a wide margin during those four years. Its recent rebound may be partially due to the sector being oversold. Furthermore, higher demand for computing power to support artificial intelligence models could boost electric utilities and justify infrastructure investments. Lower interest rates are also adding fuel to the fire, reducing the cost of capital and increasing the potential return on investment for capital-intensive projects.
The utility sector may not be the bargain it was at the beginning of the year, but it remains a solid sector for passive income-oriented investors. With its year-to-date gain looking massive and overextended at first glance, a good amount of that is due to how beaten down the sector was going into the year. Investors seeking safe, reasonably valued pockets of the market may want to consider the Vanguard Utilities ETF as a simple yet effective way to achieve diversification in the utility sector.
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