The Utilities Select Sector SPDR Fund (XLU - Get Rating) provides exposure to the utility sector in the United States. The fund uses a replication strategy to track the performance of the Utilities Select Sector Index.

Securities from companies in the gas utilities, water utilities, independent power producers, multi-utilities, and utilities for the production of renewable and independent power are included in the index. The five-year monthly beta for XLU is 0.54, reflecting its lower volatility compared to the broader market.

In a recessionary environment, the utility sector provides a solid hedge to one’s investment portfolio. In addition, this highly regulated sector is known for its low volatility in terms of financials.

XLU has gained 12.6% over the past year and 10.2% over the past nine months to close its last trading session at $74.75. In addition, it is currently trading only 4.4% below its 52-week high of $78.22.

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

Fund Stats

XLU has $18.13 billion in assets under management and a NAV of $76.66. Its gross expense ratio of 0.10% is significantly lower than the category average of 0.43%. The fund has a net flow of $3.12 billion over the past year and $804.54 million over the past month.

Top Holdings

The fund’s top holdings include NextEra Energy Inc. (NEE) with a 17.2% weight, Duke Energy Corp. (DUK) with an 8.4% weight, Southern Co (SO) with a 7.3% weight, Dominion Energy Inc. (D) with a 6.6% weight, and the Exelon Corp (EXC) with a 5% weight.

Attractive Dividend

XLU’s annual dividend of $1.98 yields 2.96% on prevailing prices. Its dividend payouts have increased at a 3.6% CAGR over the past five years. The fund has a record of 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 A rating, which equates to a 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 an A for Trade and Buy & Hold grade. In the A-rated 13-fund Utility ETFs group, it is ranked #1. You can view all XLU POWR Ratings here.

Bottom Line

During economic downturns, the utility sector typically offers stability to investors. With the rising inflation and the consequent interest rate hike enhancing the chances of an economic contraction, investing in XLU could provide a solid cushion to one’s portfolio.

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 peer, Vanguard Utilities ETF (VPU - Get Rating), Fidelity MSCI Utilities Index ETF (FUTY - Get Rating), and iShares U.S. Utilities ETF (IDU - Get Rating), which also has an overall A (Strong Buy) rating.

XLU shares were trading at $74.47 per share on Friday afternoon, down $0.28 (-0.37%). Year-to-date, XLU has gained 5.57%, versus a -18.22% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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