Whoa, yeah!
It’s electric!
It’s electric!
— Metallica, “It’s Electric”
If you’ve been a reader of mine for any length of time, you will have noticed my passion for music. Now, I enjoy listening to all kinds of music, but hard-driving rock (as you may have noticed from those Metallica lyrics) is one of my favorite genres. And rock just wouldn’t be rock without the electric guitar.
Innovations in electric guitar designs shaped modern music as we know (and hear) it. That grainy buzz of flowing electrical current is unmistakable. That’s right, what has become a mundane part of life once revolutionized music. And not just music — electricity and other power utilities have revolutionized the way we live our lives. And that revolution hasn’t stopped.
With new technologies on the horizon, power has become paramount — most notably, artificial intelligence (AI) is driving demand for power to support electricity-gobbling data centers. Such strong demand, paired with the Fed lowering rates, has the utilities sector spiking in an upward trend this year, with no indication of stopping anytime soon.
So, this week, we’ll be plugging into a new power source in the form of the Utilities Select Sector SPDR Fund (NYSEArca: XLU).
XLU is the oldest of its peers, and the largest and cheapest. It tracks the Utilities Select Sector Index, which mirrors the utilities sector of the S&P 500, highlighting exposure to companies from the electric, water and gas utilities, multi-utilities and independent power and renewable electricity producers.
The fund invests at least 95% of its assets in securities comprising the underlying index. It uses a proprietary modified market capitalization methodology. Utilities are generally seen as a defensive sector, yet with demand for power rising, utilities have become a growth opportunity. And demand is huge.
According to the Electric Power Research Institute, we could see a doubling in electricity consumption by AI data centers by 2030. It is also forecast that AI power usage will explode from eight terawatt hours to 52 by 2026. That is equivalent to the yearly consumption of electricity for the state of Massachusetts. In short, expect to continue to see utilities perform well.
XLU has outperformed the S&P 500 by around 4% year to date. It has also outperformed the mighty tech sector, showing just what a driving force demand for power can be. The fund has good liquidity with daily trading volume around 10 million shares. It has net assets of around $18.44 billion, a dividend yield of 2.87% and a miniscule expense ratio of 0.09%. It is up 4.84% over the last month, 5.77% during the last three months and 22.38% for the year to date.
Top holdings include NextEra Energy, Inc. (NEE), 14.06%, The Southern Company (SO), 7.98%, Duke Energy Corporation (DUK), 7.20%, Constellation Energy Corporation (CEG), 6.58% and American Electric Power Company, Inc. (AEP), 4.42%.
Courtesy of StockCharts.com.
As the chart above shows, the fund has been climbing since late last year and now trades just under its 52-week high of $81.54. The fund benefits from holding companies such as Constellation Energy Corporation, the fourth-largest stock in the utility sector, which has risen over 115% year to date. And with sector’s exposure to electric utilities amped up to 65.64%, this fund is definitely one to consider plugging into.
You don’t have to wait for lightning to strike. XLU is readily accessible for an investor who seeks a potent path for amping up one’s portfolio. Be aware, however, that a live wire can shock you. Investors should always do their due diligence before adding any stock, fund or ETF to their portfolio.
As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.
