Reviewing a ‘Boring’ ETF

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.
NextEra Energy

If there is a saying that expresses the mood of the market right now, it is “what is old is new again.”

In short, the high price-to-earnings (P/E) ratio technology stocks that were the darlings of the market not too long ago have now fallen out of favor, largely due to rising Treasury note yields curbing the speed of economic growth. Since the technology companies were, as I have argued elsewhere, “priced to perfection” and had the assumption of continual growth baked into their share prices, something had to give.

Now, investors’ attention has shifted to value stocks — stocks that are priced low relative to their earnings — such as banking, health care and utilities. While these stocks were previously dismissed by some investors as they are not the most cutting-edge entities on the market, they still produce goods and services that the economy desperately needs. In short, boring is sometimes good.

One exchange-traded fund (ETF) that epitomizes utilities stocks is the Utilities Select Sector SPDR Fund (NYSEARCA: XLU). The fact that this ETF invests in utilities companies that are included in the S&P 500 is both good and bad. The good news is that this ETF is a giant in its sector in terms of assets and volume. The bad news, however, is that its portfolio is often dominated by very large companies. Thus, investors who are interested in broader exposure to the sector may want to look elsewhere.

Currently, the fund’s top holdings include NextEra Energy (NYSE: NEE), Duke Energy Corp. (NYSE: DUK), Southern Company (NYSE: SO), Dominion Energy (NYSE: D), Exelon Corporation (NASDAQ: EXC), American Electric Power Company (NASDAQ: AEP), Sempra Energy (NYSE: SRE) and Xcel Energy Inc. (NASDAQ: XEL).

This fund’s performance has been problematic, especially when including the damage done by the COVID-19 pandemic. As of Jan. 18, XLU has been down 1.29% over the past month and up 6.24% over the past three months. It is currently down 4.21% year to date.

Chart courtesy of www.stockcharts.com

The fund has amassed $13.11 billion in assets under management and has an expense ratio of 0.12%.

In short, while XLU does provide an investor with a way to profit from utilities stocks, this kind of ETF may not be appropriate for all portfolios. Thus, interested investors always should conduct their due diligence and decide whether the fund is suitable for their investing goals.

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