Why AI Makes Utilities Great

Over the last decade and a half, technology stocks, as a whole, have outperformed their peers by a massive margin.

Even today, the tech-heavy Nasdaq 100 continues to lead the major indexes.

But there’s been a sneaky mover in the last three months, gaining almost 15% compared to technology’s measly 2%.

We’re talking about the Utility sector, as measured by the XLU ETF.

We wouldn’t have seen this without the dramatic increase in search volume by financial pros in our TrackStar data.

Typically, utilities plod along, increasing in value when interest rates decline and economic activity increases.

Yet, the push for power-hungry AI data centers has helped boost power company stocks in the last few months.

This could be the start of an under-the-radar trend.

And if you’re looking to hop on board, here’s why you should consider the XLU.

Key Facts About XLU

• Net assets: $13.4 billion
• 12-month trailing yield: 3.05%
• Inception: December 16, 1998
• Expense ratio: 0.09%
• Number of holdings: 32

The modern world and economy live on energy.

Utility companies ensure there’s electricity there when you need it, whether powered by coal, gas, solar, or a hamster on a wheel losing its mind.

The XLU ETF holds 32 of the largest utility companies in the U.S., weighted by their market capitalizations.

Source: State Street

Power companies make up the vast majority of the companies in this index, though water utilities are part of it as well.

Source: State Street

Performance

Utilities rely on large amounts of debt to fund their capital-intensive operations and pay consistent dividends.

Consequently, their profitability rises and falls along with interest rates.

They also don’t see extreme demand volatility since people need lights, air conditioning, heating, etc., regardless of economic conditions.

So, these stocks typically don’t see a lot of price movement.

Source: State Street

Competition

We compared the XLU to other sector ETFs to get a sense of their performance, dividend yields, and costs.

• Energy Select Sector SPDR Fund (XLE): Holds companies that operate anywhere in the energy supply chain from upstream drilling to downstream marketing.
• Technology Select Sector SPDR Fund (XLK): The XLK is a lot like the NASDAQ 100, but without any of the non-tech companies. It holds only stocks classified in the tech sector.
• Real Estate Select Sector SPDR Fund (XLRE): One of the lesser known ETFs, the XLRE mainly holds real estate investment trusts.
• SPDR S&P Biotech ETF (XBI): Rather than investing in individual biotechs, the XBI lets you play the sector while diversifying across 135 different companies.

What’s fascinating is how far ahead tech companies are from the rest. Yet, even high-volatility biotech companies haven’t performed as well as utilities.

Our Opinion 10/10 

We believe there is no better vehicle to invest in utility companies.

The XLU is liquid, runs at negligible costs, and pays a nice +3% dividend yield.

That said, we’d be cautious about buying the ETF after such a run because it rarely sees price appreciation this quickly.