VPU won the last round in my search for low(er) beta equity funds against PFF and USMV, and now faces off against two more contenders: a consumer staples sector fund (VDC) and a financial industry preferred shares fund (PGF)... And the winner is…it’s complicated.
This post will make a whole lot more sense if you read this one:

Short version: VPU delivered good returns while being the least correlated with other equity funds. USMV had the highest returns, but at correlation numbers that weren’t all that low and made me think if really I should be testing minimum-volatility funds with small-cap value funds, as their profiles were similar. PFF was the loser of the three, as it had the lowest performance, without all that much in the way of diversification benefits. Turned out so badly for PFF that it actually made me switch it out as an asset in a few portfolios.
That test also made me think that I hadn’t really done a wide enough survey, and that I would need to test some other possibilities before I really felt even partially comfortable slapping the “preferred asset” tag on anything in this category. So for this test, I began with a more open-ended search for, non-leveraged, equity funds, limited them by beta (maximum: .6) and then ranked them by AUM. That search produced the funds I already tested, plus some similar funds from other fund families.
Before preceding: Why even conduct this search? The hope is that by finding an equity fund with lower correlation to other equities that you can get somewhat of a diversification benefit while still getting equity-level returns. Realistically, something around .5 correlation to the S&P 500 would produce a little more zag when the rest of the market zigs, without taking too much away from the portfolio in terms of total return. A fund like that could be a middle ground between the core equity funds, on the one side, and fixed income, gold, managed futures, and other alternatives on the other side. Ideally, a fund like this should help out the RP portfolio.
The Candidates
VPU
Vanguard’s Utilities ETF, Fund page, Barchart Summary. Winner of the first round, and also beat out VNQ is an earlier test, so this one has really been through the ringer, and been described before.
VDC
Vanguard Consumer StaplesETF. Fund page, Barchart Summary. VDC tracks the 100 stocks in the MSCI US IMI Consumer Staples index. High concentrations in the soft drink, packaged foods, household products and supermarket industries, with all the big brand names: Procter & Gamble, Coca-Cola, and Costco. The idea behind these is they generate reliable sales, have established expenses, and churn out repayments to investors with less sensitivity to economy-wide and market fluctuations.
PGF
iShares Financial Preferred ETF. Fund page, Barchart Summary. I’m giving preferred shares a second chance with this one. Whereas PFF is 90% in preferred shares in utilities companies (even though the name alone doesn’t indicate that; it’s just what it winds up being in), this one is 90% in preferred shares of financial companies. Including this one in the test should provide a sense of whether preferred shares are generally a problem or if the poor comparison made by PFF was just because it was concentrated in the wrong type of preferred shares.
As for the basics of each fund:

How Will I Decide?
I’ll use the same criteria to make a decision as I used in round one:
- The lower correlation with the stock market the better, though I can’t expect the correlations will be as low as gold or commodities. Less than .5 would be awesome, less than .6 would be decent, and higher than that, well, we don’t really get much diversification benefit from holding it, namely a stronger perpetual withdrawal rate.
- As long as returns are decent, of course. Using a total return perspective, I really want to see how RP portfolios with each of these will fare.
First Criterion: Correlation
Here are the correlation numbers for these three funds compared with a slate of equities funds (total US stocks, Large-cap Growth, Small-cap Value, total International stocks). The timeframe goes back to December, 2006:

Both VPU and PGF come out looking good, with PGF having lower correlation compared to VTI and VUG, while VPU has lower correlations compared to VBR and VXUS. Importantly, both of these are in the range of what I’m looking for in a low(er) beta fund. The numbers for VDC, meanwhile, are pretty high: in the upper .6s or low .7s for the different equity funds. That’s higher than I originally wanted in my search. I set my stock screener criterion for a maximum of .6, and while its 60-month beta qualifies, this longer view shows that that’s lower than usual.
Second Criterion: Total Performance
To run the backtest, I used the skeleton of the Golden Butterfly portfolio, but substituted the 20% normally allotted to small-cap value to each of the three funds:
- 20% VFINX: Vanguard S&P 500 Mutual Fund
- 20% TLT: iShares Long-term Treasuries
- 20% VFISX: Vanguard Short-term Treasury Fund
- 20% IAU: iShares Gold Trust
- Then 20% in either VPU, VDC, or PGF
- I also ran one iteration of the original Golden Butterfly, with VBR (Vanguard’s Small-cap Value fund) in this spot.
The primary backtest goes back to November, 2011 (here is the link for VPU, VDC and PGF; here is the link with VBR):

Interesting. VDC and VPU are both close to each other, though the VDC portfolio has the edge in CAGR, standard deviation, and Sharpe Ratio. Keeping in mind that 80% of each portfolio is the same, the different 20% does make a difference. Not a large one, but one that you wouldn’t turn down, either. Those two even beat out the original Golden Butterfly containing small-cap value, which is notable. PGF, meanwhile, isn’t looking that great. Its growth rate was 1.1% under VDC and .9% under VPU, a pretty substantial gap.
I then wanted to test these portfolios under the same conditions as the last test, which had a limited timeframe based on the relative youth of USMV. That backtest went back to November, 2011, just when the market was starting to dig out from the rubble of the Global Financial Crisis. Here is the link to the second backtest with the main three, and here is with VBR:

Once again, a pretty close finish between VPU and VDC. So close, in fact, that I had to go to the next decimal place to show the amount by which VDC beat out VPU. Again, VDC bests VPU in three out of the four categories, only losing out in terms of max drawdown. But for this timeframe, notice how both lose out to the original portfolio with small-cap value in terms of growth rate, though really, they are all pretty close. PGF, meanwhile, has another poor showing.
Looking at the funds individually through Portfolio Visualizer’s Fund Analysis tool, gives you a better sense of VDC’s superior returns:

When considering it on its own, VDC definitely would have been the choice to have since late 2006. That’s a substantial sample size, as it includes the GFC, followed by a great decade for equities, then the Covid crash, the recovery, and whatever it is we are dealing with here in the fall of 2022. Throughout the ups and downs, the money-generating power of companies selling fizzy drinks, toothpaste, or $1.50 hot dogs has outpaced that of utilities and the banks.
Other Considerations
In terms of the basics of the funds, all three of the test funds look fine in terms of expense ratios, number of holdings, and size. Both VPU and VDC are low-cost Vanguard funds, each with an expense ratio of .1%. PGF’s is much higher (.55%) and given the tests above, it seems unjustified. As for the number of holdings, these are all small-ish sector funds: VPU has 68 funds, VDC has 103 and PGF has 111. VPU and VDC have similar AUMs and since they are Vanguard funds, I wouldn’t worry too much about liquidity problems or fund closure.
So…What’s the Preferred Asset for a low(er) beta equity fund?
Like the first round, I tested three funds and wound up with two that were close, and one that fell way back. Just like the last test, it’s the preferred shares fund which finished way behind the others. It did have good numbers for correlation, or rather, lack thereof, but fell off a cliff when it came to the performance tests. I wrote off PFF after the last iteration, and I feel comfortable writing off PGF now. I just don’t see the rationale for investing in them when better options exist.
That leaves the two sector funds for Utilities and for Consumer Staples. I had a hunch before I started that VPU would prove superior, so I was a bit surprised to see that VDC won both backtests. As mentioned before, VPU and VDC were limited to an allocation of 20%, so the fact that you still got meaningful advantages with VDC is important. A 20 basis point edge when it’s only 20% of the portfolio is a nice margin to see.
At the same time, VDC lost out big time when it came to correlation, so once again, I’m wondering if VDC’s better performance comes really from it being in the wrong comparison. I wanted to look for high-performing, low(er) beta funds: I got the first part, but not really the second. Looking at the backtests, I think what’s happened is that the raw performance of VDC was enough to make its higher correlation not very relevant. VDC’s returns overpowered VPU, rendering the diversification benefits of VPU secondary.
Just for kicks, I then tested out how VPU and VDC would do against my preferred asset for small-cap value: AVUV. The timeframe is very short, so don’t make too much of it, but AVUV trounced them both, albeit with much higher standard deviation. AVUV did to VDC what VDC did to VPU, just blasting it in terms of return to the point where it’s all you can really notice. 11.4% CAGR versus 5.7%? I’ll take it – high standard deviation or larger drawdowns be damned.
In the end, the evidence points to…a complicated answer that really isn’t an answer. I wish it were more clear cut, but it looks like if you want a true low(er) beta fund, then VPU would be your best bet, except that the name of the game is returns, and VDC looks like it would have a greater shot at helping you in the portfolio. Meanwhile, it is not clear that either one is better off than small-cap value.
When speaking of adding VPU or VDC, or both, you’re talking about an overweight in these sectors. Assuming you are adding this to a portfolio that already has equities, then you’re not talking about having the companies in the fund or not, since they’d already be in your other equity funds. When thinking about these from a Risk Parity perspective, adding either of these would complicate your portfolio, and I’m not sure if either is worth it. I’ll keep the test portfolios as they are, since VPU seems to be the most “Risk Parity-y” one out there and its profile is a wee bit more appealing to me, but that is really the most tenuous endorsement possible.
All this is pretty anticlimactic. After all this research, I don’t think I have an answer to whether to include low(er) beta equities in your portfolio, much less which fund to have. Oh well. It reminds me of the wisdom of the great Nuke LaLoosh, substituting research for baseball: