Utilities Select Sector SPDR Fund (XLU - Get Rating) employs a replication strategy to track the Utilities Select Sector Index. The fund provides exposure to the U.S. utility sector, a stock market space known for relatively low volatility and relatively high distribution yields.

The Federal Reserve announced another 75-basis-point interest rate hike and indicated that it would likely dish out more aggressive rate hikes to tame the worst inflation in decades. This has raised recession concerns.

However, a recession does not impact all sectors equally. Amid this backdrop, the utility sector is considered defensive because of the inelastic demand it enjoys.

Utilities Select Sector SPDR Fund has gained 10.7% over the past year and 9.6% over the past three months to close its last trading session at $72.60. In contrast, the S&P 500 has declined 14.5% and 0.1% over the same periods. XLU has gained 1.4% year-to-date, while the broader market declined 21.2% over the same period.

Here are the factors that could affect XLU’s performance in the near term:

Steady Fund Stats

As of September 22, XLU has $17.32 billion in assets under management and a NAV of $72.59. Its gross expense ratio of 0.10% is significantly lower than the category average of 0.43%. The fund has a net inflow of $3.45 billion over the past year and $3.31 billion over the past three months. XLU has a five-year monthly beta of 0.54.

Top Holdings

As of September 21, XLU’s top holdings include NextEra Energy, Inc. (NEE) with a 15.99% weight, The Southern Company (SO) with a 7.84% weight, Duke Energy Corporation (DUK) with a 7.78% weight, and Dominion Energy, Inc. (D) with a 6.37% weight.

Attractive Dividend

XLU’s annual dividend of $1.98 yields 2.96% on prevailing prices. Its dividend payouts have increased at a 2.9% CAGR over the past three years and a 3.6% CAGR over the past five years. The fund has a four-year average yield of 3.06% and 11 years of consecutive dividend growth.

POWR Ratings Reflect Promising Prospects

XLU’s strong fundamentals are reflected in its POWR Ratings. The ETF has an overall rating of A, which equates to Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

XLU has a Trade and Buy & Hold grade of A and a Peer grade of B. In the 13-ETF Utility ETFs group, it is ranked #1. The group is rated A.

Click here to see the POWR Ratings for XLU.

View all the top ETFs in the Utility ETFs group here.

Bottom Line

The interest rate hike has aggravated recessionary concerns in the economy. The utility sector usually holds up well in such an economic backdrop. As XLU has shown resilience, outperforming the broader market this year, and considering its strong fund statistics, this ETF might be a solid buy now.

How Does Utilities Select Sector SPDR Fund (XLU) Stack Up Against its Peers?

While XLU has an overall POWR Rating of A, one might consider looking at its industry peers, Vanguard Utilities Index Fund (VPU - Get Rating) and Fidelity MSCI Utilities Index ETF (FUTY - Get Rating), which also have an overall A (Strong Buy) rating.

XLU shares were trading at $71.67 per share on Friday morning, down $0.93 (-1.28%). Year-to-date, XLU has gained 2.29%, versus a -21.61% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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