Utilities: The Mystery ETFs Beating Tech

The utilities sector has come out of its shell. But financial advisors and self-directed investors might just prefer it crawled back.

Utilities, or “Utes” for short, have been the proverbial turtles of the stock market sector business for decades. After all, these are regulated businesses, providing essentials services like moving electricity, gas and some forms of alternative energy including nuclear in some cases.

Still, if an advisor told a client they were excited about investing in utilities, they might be accused of not having had enough sleep the previous evening.

And that would be too bad because 2024 has put a charge into this sleepy sector. Judging by the performance of the Utilities Select Sector SPDR ETF (XLU), a $15 billion fund that owns all the stocks from the S&P 500 that are classified in that sector, that perception may be changing.

Utilities ETF a Surprise Performer in 2024

XLU was the third-best performing S&P 500 sector ETF year-to-date through the last Friday in July, its 14% return trailing only financials and communications stocks. Just in case you missed the buried headline in there, XLU outperformed the tech sector over that nearly 7-month period. 

And with a yield over 3%, it continues to serve a role as a place where investors can flock to dividend stocks, or simply use this part of the stock market when interest rates are falling. Utilities have at times correlated highly with bond prices, owing to their conservative nature.

These Aren't Your Parents' Utilities

But is that changing? If Utilities ETFs are starting to become more “hip” in the eyes of investors and advisors, there are two likely reasons. One is their role in helping to stoke the continued growth of artificial intelligence. All of that computing requires the type of power these companies generate.  

The other angle here is infrastructure. At a time when the U.S. is creating more and more ultra-wealthy families, the fact remains that the roads bridges and tunnels we use, as well as the ancient electrical grid, are in severe disrepair. That ultimately led to an increase in dedicated long-term government spending to upgrade infrastructure across the U.S.. That is not a “now” impact on this sector, but it potentially puts a “bid” under it in the years ahead.

Using ETFs to access the utility giants, like XLU does (where just eight large companies comprise nearly half of the fund’s assets), is one standard way to pursue utilities investing. Others, like the $7.5 billion Global X US Infrastructure Development ETF (PAVE) spread the risk and de-emphasize traditional electric and gas utilities, focusing instead on the pure infrastructure growth theme.

Small Cap ETFs Worth a Look

Nontraditional ETFs to access this market area include the Invesco S&P 500 Small Cap Utilities & Communication Services ETF (PSCU). This is a small cap ETF that is also small, at under $15 million in assets under management. Yet at the very least, its look through its holdings (15 stocks make up about two-thirds of the fund) provides investors with a set of potential stock ideas that don’t typically get much attention.  

As the stock market grapples with its long-term direction, the one thing we can say about the utilities sector is this: it is a different neighborhood than it used to be. And that should provide a reason for advisors and investors to approach it with more curiosity than the old days, where this sector was often referred to as “bond-like stocks.”