ETF Spotlight: XLU Leads 2024’s Top-Performing Sector

In 2024, utilities have emerged as the top-performing sector, and the Utilities Select Sector SPDR Fund (XLU) has been at the forefront, offering stability and reliable income to investors. 

Through Oct. 31, XLU is up nearly 30%, which trounces the broader market’s gain of approximately 22%, as measured by the tech led SPDR S&P 500 ETF Trust (SPY). 

XLU is designed to mirror the performance of the utilities sector within the S&P 500, encompassing companies that provide essential services such as electricity, natural gas, and water.  

With its targeted focus on stable, dividend-paying utility companies, XLU has become an attractive choice for investors looking for defensive holdings and inflation resilience amid economic uncertainty and high interest rates. 

How XLU Works

The XLU ETF is passively managed and seeks to closely match the performance of the S&P Utilities Select Sector Index, which comprises 30 of the largest publicly traded utility companies within the S&P 500. Top holdings typically include well-established companies like NextEra Energy, Duke Energy, and Dominion Energy, which dominate the utility landscape in the U.S.  

Because the fund is market-cap weighted, larger companies represent a higher percentage of the ETF's holdings, with the top ten positions often accounting for over 60% of the fund. 

XLU’s passive management means it’s structured to replicate the performance of the underlying index rather than actively select or manage individual utility stocks. With a relatively low expense ratio of 0.09%, XLU provides cost-effective access to the utilities sector. The ETF is also known for paying consistent dividends, as utilities tend to generate stable cash flows that support regular dividend payments. 

XLU’s Potential Benefits

While utilities stocks are known for their stability and defensive qualities, XLU and other utilities ETFs are still susceptible to market risk and can see price declines in a slowing economy. Here are some of the key benefits of XLU and utilities ETFs: 

• Stability and defensive qualities: Utilities are often seen as a defensive sector because demand for electricity, water, and gas is relatively inelastic; people and businesses require these services regardless of economic conditions. As a result, utilities are generally less volatile than sectors like technology or consumer discretionary, which are more cyclical. 
• Attractive dividends: The XLU ETF is popular among income-seeking investors because of its attractive dividend yield. Utilities tend to pay high dividends, making XLU a valuable holding for those looking for passive income. In low-interest-rate environments, this income potential becomes even more appealing, although XLU has maintained strong interest in 2024 despite higher rates due to the sector's reliable yield and stability. 
• Inflation and rate hedge: Utilities often have regulated pricing mechanisms, allowing them to pass on costs to consumers, which can help them maintain profitability in inflationary environments. This pricing power, combined with the sector's steady demand, has helped keep XLU resilient in 2024. Additionally, utility companies are often able to lock in long-term debt at favorable rates, allowing them to manage rising interest rates better than some other sectors. 
• Beneficiary of energy transition: As the world transitions to cleaner energy, many utility companies are investing heavily in renewable energy infrastructure. Companies in the XLU portfolio, such as NextEra Energy, are leaders in renewable energy. This trend not only aligns utilities with global sustainability goals but also opens opportunities for long-term growth as the sector adapts to a green energy future.  

Is XLU Right for Your Portfolio?

The XLU ETF provides a straightforward and cost-effective way for investors to gain exposure to the U.S. utilities sector. With its focus on stability, defensive qualities, and income generation, XLU is well-suited for conservative investors seeking shelter from volatility, as well as income-oriented investors who value regular dividends.  

The sector's 2024 performance underscores its role as a reliable part of a diversified portfolio, especially amid economic uncertainty and inflationary pressures. Additionally, XLU's alignment with long-term trends like renewable energy transition positions it for sustained relevance in the years to come.  

However, as with any investment, XLU also comes with risks, including sensitivity to interest rate changes and regulatory shifts. Nonetheless, for those seeking stability and a steady income, XLU stands out as a sound choice in today’s uncertain market.