The utility sector is known for its defensive qualities, providing a stable investment option in times of market uncertainty. By overweighting defensive sectors, investors can lower the volatility (risk) of their portfolios. Many will refer to Canadian utilities as ‘bond proxies’ due to their steadiness. However, the true strength lies not in the dividends they offer but in the inherent defensive nature of these companies. Utility stocks are considered defensive because they tend to perform well during economic downturns. Consumers continue to need electricity, water, and other essential services even when the economy is struggling. On the Sunday Reads we’ll take a look at Canadian utility stocks and ETFs.
There are a few reasons for an investor to embrace the utilities sector. They may want a portfolio that is less volatile. A retiree can witness a real financial benefit as a portfolio that experiences lesser drawdowns in recessions can create greater and more durable income over time.
Defensive sectors
In this post, the defensive sectors for retirement – the three defensive sectors were almost twice as good as a traditional balanced stock and bond portfolio. That is to say, the portfolio moved through the financial crisis of 2008-2009 and left the retiree with a portfolio almost twice as large as the traditional 60/40 balanced portfolio.
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Keep in mind past performance does not guarantee future returns. That said, consumer staples, utilities and healthcare have a long history of offering greater portfolio stability.
Canadian utility stocks and ETFs
That above posts looks to U.S. staples, utilities and healthcare stocks. There’s no better place to find multinational consumer staples and healthcare stocks. The healthcare sector is non-existent in Canada. Our consumer staples sector in Canada (XST.TO) is very good, but is mostly domestic. More on that later.
In the Globe & Mail Rob Carrick offered an article (sub required) on Canadian utility ETFs. Rob noted that the fees for these ETFs are quite large compared to market index-based ETFs. The fees are in the 0.32% to 0.61% range. That said, that is the norm for ‘specialty’ or sector ETFs. Rob looked at three Canadian utility ETFs …
The two high-fee funds are the BMO Equal Weight Utilities Index ETF ( ZUT-T), with assets of $500-million and 14 total holdings; and the iShares S&P/TSX Capped Utilities Index ETF ( XUT-T) with assets of $379-million and 15 holdings.
Canadians should avoid most mutual funds
A third fund, the Global X Canadian Utility Services High Dividend Index ETF (UTIL-T) will on March 4 reduce its current MER of 0.61 per cent to an estimated 0.32 per cent. UTIL has assets of $379-million and 15 holdings.
Core utilities or extended universe?
One key decision that an investor will make is – what types of utilities do you want to own? You can stick to the traditional power/electricity producers, or you can include pipelines and the modern utilities known as the telcos.
ZUT.TO and XUT.TO are traditional power utilities. They are very similar, except the BMO ZUT is equal-weighted while the iShares XUT is cap-weighted (the largest companies get the greater weighting within the index). I’d give the edge to the BMO ETF.
UTIL.TO from Global X includes the pipelines and telcos. Given that, there is greater growth potential with that extended mix. But of course, Canadian investors know that the telco sector has been hard hit. The telco exposure has hurt performance in recent years.
Related post: I’m hanging up on half of my Bell stock. Soon after that post, I did a second hang up and said good bye to Bell, forever perhaps. For my wife and I, we still have positions in Telus and Quebecor. It’s possible the worst is over for the telco sector. They are making adjustments, lower rates are bringing borrowing costs down.
From my above defensive sector post, I offered these ETFs for consideration.
Canadian consumer staples ETFs
- BMO – STPL
- iShares – XST
Canadian utilities ETFs
- iShares – XUT
- BMO – ZUT
- BMO Covered Call Utilities – ZWU
- Horizons – UTIL
- Hamilton – HUTS. This ETF uses modest leverage.
We have modest positions in the HUTS.TO utililities ETF. It offers exposure to the classic utilities, plus the pipelines and telcos. It applies 25% leverage. The ETF can be tax efficient but always confirm with your accountant or advisor. We hold ENB.TO, TRP.TO and PPL.TO and XST.TO. Our U.S. staples and healthcare exposure comes by way of individual stocks. This week I will do a Zoom call covering our market-beating U.S. stock portfolio, send me a note if you’d like an invite to that Zoom call.
The full list of Canadian utilities ETFs
Here’s a very good post from CBOE covering the Canadian utilities sector. That is the go-to destination when you’re looking for the complete list of ETFs in Canada. You can sort by sector, geography, style and more.
To avoid the ETF fees you might certainly create your own Canadian utilities ETF and simply buy enough of ’em. That’s up to you.
While there is tariff-risk with Canadian pipelines, most would suggest that Trump’s threats ring hollow in the energy space. The U.S. needs our oil and gas. It is not replaceable in quick fashion. That said, the risk is present over time.
Better returns with less risk
In timely fashion Norm Rothery offered a wonderful post in the Globe & Mail, looking at the broader Canadian utilities space – including telcos and pipelines.
The utilities form the benchmark portfolio that, when rebalanced monthly, gained an average of 8.7 per cent annually over the 25 years to the end of February, 2025. In comparison, the S&P/TSX Composite Index – a reasonable proxy for the Canadian stock market – climbed by an average of 7.0 per cent annually over the same period. If the benchmark portfolio is further refined to only include dividend-paying utility stocks, the results are better, with average annual returns of 11.9 per cent over the same 25 years.
Norm offered this chart on risk / drawdowns.
In the Globe, it is an interactive chart, I can offer the drawdown numbers. In the dot com crash of early 2000’s the low volatility utility portfolio was down only 5%, in the financial crisis and COVID correction, down about 15%. The portfolio was down about 20% in 2022 due to the interest rate hikes. The utilities are more sensitive to rates than recessions.
That is a very encouraging look at risk.
Here’s the lowest volatility baker’s dozen utilities from Norm’s Globe & Mail post …
Past performance does not guarantee future returns and performance.
The Sunday Reads
Dividend Hawk had a busy week with his portfolio.
Canadian banks reported this past week and the numbers were quite encouraging …
- Royal Bank of Canada (RY) Reports First Quarter 2025 Results; RY reported quarterly adjusted EPS of C$3.62, higher than C$2.85 from the same period last year and beating analyst expectations of C$3.26. Revenue of C$16.74 billion, up 24.1% YoY, surpassing analyst estimates of C$15.60 billion. CET1 ratio of 13.2%, steady on the prior quarter. Provision for credit loss was lifted to C$1.05 billion from C$840 million the quarter before and C$813 million in the same period last year.
- The Toronto-Dominion Bank (TD) Reports First Quarter 2025 Results; TD reported first quarter Non-GAAP EPS of C$2.02, 1% above last year’s result and $0.06 more than expected. Revenue Increased 9.2% year-over-year to C$15.03 billion, exceeding estimates by C$1.82 billion. Common equity Tier 1 capital ratio stood at 13.1% at the end of January, unchanged compared with last quarter. PCL of C$1.21 billion, C$103 million higher than for the prior quarter and C$211 million above the same period last year.
- Canadian Imperial Bank of Commerce (CM) Announces First Quarter 2025 Results; CM reported fiscal Q1 adjusted earnings of C$2.20 per diluted share, up from C$1.81 a year earlier, while mean expectation of analysts was CA$1.96. Revenue rose 17% to C$7.28 billion from a year ago, analysts expected C$6.86 billion. CET1 ratio was 13.5% at January 31, 2025, compared with 13.3% at the end of the prior quarter. Provision for credit losses were C$573M, up from C$483M in the prior three-month period and down $12 million from the same quarter last year.
Feeling the tariff threat
The bank index was up modestly for the week, but is flat for 2025. The tariff threat is providing an overhang. The Canadian economy will certainly take a serious hit if there is a wide spread tariff war. Economists agree we would slip into a recession.
At Banker on Wheels it’s the U.S. against the rest of the world.
In the banker post you’ll find a 50-page deep dive into U.S. and global 60/40 balanced portfolios.
You’ll also find a link to the Berkshire Hathaway (Warren Buffett) annual letter.
Berkshire reported strong results. The stock shot up over 6% for the week, and is up almost 14% in 2025. Berkshire (BRK.B) is my wife’s largest holding; now over 40% of her spousal RRSP account.
There are a few good posts this week at Findependence Hub.
We are looking at playing offense vs defense from Noah Soloman.
Tariff Tantrum: Protecting your portfolio with defence and income.
Yes, a lot of folks have risk and risk management in their minds these days. We’re investing in the zero visibility age. It is shocking, as it appears that the U.S. has abandoned the defence of Ukraine and Europe and democracy. The U.S. has declared economic war on Canada and much of the developed world. But let’s keep our heads. Risk is risk. It can take many shapes and forms. On Twitter / X I offered …
Uncertainty is certainly creating some fear …
Stocktrades looks at ETFs for your RRSP.
On Cut The Crap Investing – How to invest this RRSP season.
Loonie and Sense is looking over seas …
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For February we received $39.00 in cash. You can select 3 categories for 2% cash back. The rest pays at 0.50%. That’s one of our lowest spending levels of the last several years. Our fuel bill is way down and so is our grocery bill.
That cash went into my TFSA account to buy some CBIL.TO and VDY.TO.
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