A Low-Cost, High-Yielding Equity Sector ETF
In a low-rate environment, this large, liquid ETF, which holds the biggest U.S. utilities firms, could offer some appeal.
For investors seeking broad exposure to defensive, high-yielding United States utilities companies, Utilities Select Sector SPDR (XLU) is a strong, appealing option. This low-cost exchange-traded fund contains only mid- and large-cap U.S. utilities firms, as it only holds companies that are included in the S&P 500. That means it owns more-stable utilities. The fund follows a market-cap-weighting scheme, where larger companies tend to hold more sway. Over time, that has led to mixed performance. During periods when large- and mid-cap names outperform smaller-cap ones, this fund does better than an equal-weight option, while during periods where small- and mid-cap names tend to outperform larger utilities names, an equal-weight utilities ETF would perform better.
XLU's holdings include regulated utilities, diversified utilities, and unregulated power generators. Many utilities firms are known for their reliability and income generation. This ETF is suitable as a satellite holding for a diversified equity portfolio, given that the utilities sector makes up only about 3% of the S&P 500. The fund also can serve as a tactical bet on low interest rates and long-term growth in electricity demand.
Robert Goldsborough does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.