From Worst to First: Utilities ETFs Rise Past Other Sectors

The utilities sector is now the best-performing sector of the year, a dramatic turnaround from earlier in 2024 when it was the worst performer. 

The $13.2 billion Utilities Select Sector SPDR Fund (XLU) was last trading with a year-to-date gain of 13.6%, outperforming the 10% return for the SPDR S&P 500 ETF Trust (SPY). 

On Jan. 24, XLU was down by 5.3%, which at the time, was the worst performance among SPDR’s 11 sector ETFs. And as recently as March 15, the ETF was flat on the year versus a nearly 8% gain for SPY. 

XLU’s underperformance earlier this year might have involved interest rates. For much of the past two years, rates and XLU’s share price exhibited a strong inverse correlation. 

When rates went up, XLU fell; and when rates went down, XLU rose. 

That relationship held earlier this year. When the 10-year Treasury bond yield started rising in January and February, XLU slipped. 

Higher bond yields make utility stock less compelling for some investors who purchase them for their steady dividend payments. 

Interest Rates Affected XLU

However, when interest rates kept rising in March and April, the established relationship broke down, and XLU moved higher instead of lower.

Perhaps utilities investors were relieved that, even after jumping from their lows at the start of the year, interest rates remain below their highs set last October. 

Other investors may be buying them in anticipation of growing demand for electricity on the back of the artificial intelligence boom. 

“After a decade of flat power growth in the U.S., electricity demand is forecast to grow as much as 20% by 2030,” according to Wells Fargo research cited by CNBC. 

That could bolster profits and dividends for utility companies, making their shares more attractive even in the face of higher interest rates.