Income · Stocks to Consider and Updates

Utilities Select Sector SPDR ETF – Update

 XLU The Utilities Select Sector ETF (NYSE: XLU – $50.68) has performed well over the past year and over the past six months. Since October, 2015 the fund has returned 16.6% to investors including price appreciation and dividend income. For the past 52-weeks, the fund has returned 15.9%. XLU tracks the Utilities Sector Select Index, investing in all 29 utilities companies in the S&P 500, and it weights these holdings in proportion to their float-adjusted market capitalization. S&P’s cap-weighting approach limits individual positions to 19% of the portfolio, though XLU’s largest holding falls well below that mark. Electric utilities represent 56% of the portfolio, but diversified utilities also have meaningful weight (39%). Independent power producers and energy traders and gas utilities, respectively, account for 2.5% and 1.5% of the portfolio. Because of its limited number of holdings, the portfolio is highly concentrated. As seen in the chart below, the top 10 holdings represent nearly 60% of the fund’s assets.


      Utilities have been an investor favorite during the current low-interest rate environment and their appeal should continue for a while. Nonetheless, the individual stocks comprising the portfolio are getting a bit pricey and any move by the Federal Reserve to hike short-term interest rates will have a negative effect on utilities and the fund. For now, I would recommend riding the wave and maintain a 7% allocation in an otherwise well-diversified income portfolio.


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