The Utilities Select Sector SPDR Fund (XLU) ETF has done well this year, helped by the strong growth of most utility companies. It has jumped by almost 30%, outperforming the Vanguard S&P 500 (VOO) and the Invesco QQQ ETF (QQQ) ETFs.
This performance is encouraging since utilities have not done well in the past decade, with the XLU rising by less than 85%. In this period, many utilities, especially those in California, have had to spend billions to deal with forest fires, with PG&E filing for bankruptcy protection in 2019.
What is the XLU ETF?
The XLU ETF is a low-cost fund that tracks the Utilities Select Sector Index, which focuses on utility companies in the S&P 500 index. It has had net inflows of over $730 million this year, bringing the total assets under management to over $14 billion. Notably, it has added assets in the last six consecutive months.
The XLU ETF has invested in 31 companies and has a forward P/E ratio of 20.3 and a price to cash flow multiple of 9.75. Analysts expect that it will have an EPS growth of about 8.2% in the next three to four years.
Most of the companies in the fund are electric utilities followed by multi-utilities. The other categories in the fund are gas, water, and independent power and renewable energy producers.
NextEra Energy is the biggest company in the fund. As I have written before, NextEra is the biggest utility in the United States, serving millions of companies, mostly in Florida. It is widely known for generating most of its power from renewable energy.
NextEra’s business has been growing in the past few years as its annual revenue has risen from $19 billion in 2019 to over $28 billion in 2023. Its profit has almost doubled in the same period to $7.3 billion.
Southern Company is another big part of the XLU ETF. It is a large company valued at over $100 billion that owns several utility firms. It owns Alabama Power, Georgia Power, and Mississippi Power which provide power to millions of companies. It also owns Southern Nuclear, PowerSecure, and SCS.
Southern’s revenue has grown gradually in the past few years, with its revenue rising from $20.6 billion in 2019 to over $24.3 billion last year.
Read more: NextEra Energy CEO predicts renewable energy demand to triple by 2030 despite Q2 revenue miss
Energy demand is rising
The other big names in the XLU ETF are Duke Energy, Constellation Energy, Sempra, Dominion Energy, and Vistra.
Most of these firms have done well this year. As we wrote recently, Vistra has become the best-performing company in the S&P 500 index this year.
Constellation Energy stock also went parabolic after inking a long-term deal with Microsoft, the third-biggest company globally. The deal will see it restart the Three Mile nuclear power plant and supply energy to Microsoft’s data centers.
Other companies have also made similar large deals this year. For example, Google inked a deal with Oklo that will see it receive modular nuclear power from the firm, which is backed by Sam Altman.
This means that power demand is rising in the US, led by data centers, which are powering artificial intelligence (AI).
Analysts anticipate that power demand will continue growing in the next few years, a move that will benefit most utility companies.
Read more: NextEra’s NEE stock yields 2.8%, NEP yields 14%: better buy?
Reeves Utility Income Trust | UTG
The XLU is one of the best utility companies to invest in. The other alternatives are funds like the iShares US Utilities ETF (IDU), Fidelity MSCI Utilities Index ETF (FUTY), and the Vanguard Utilities Index Fund ETF (VPU). All these are similar funds that tend to have similar returns since they follow the same companies.
The Reeves Utility Income Trust (UTG) is another fund you can invest in to complement the XLU. unlike XLU, it is a closed-end fund with over $2.7 billion fund, and a much higher dividend yield of almost 7%. By subtracting the 7% yield with the 2.2% expense ratio, the fund has a net yield of about 5%, higher than XLU’s 2.7%.
It has 64 companies, with the biggest ones including Constellation Energy, Public Service Enterprise Group, Deutsche Group, and PPL Group.
Established in 2004, the fund has returned over $1.5 billion to its shareholders. It has also annual total returns of almost 10%.
Over the years, the XLU ETF has done better than the UTG. For example, its total shareholder return in the past five years was 50%, higher than UTG’s 31.30%. It also has a lower expense ratio of 0.09% compared to UTG’s 2.23%.
The risk for investing in the XLU and UTG is that the two funds have done well this year, meaning that a reversal cannot be ruled out in 2023.
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