On this episode of the “ETF of the Week” podcast, VettaFi’s head of research, Todd Rosenbluth, discussed the State Street Utilities Select Sector SPDR ETF (XLU A) with Chuck Jaffe of Money Life. The pair discussed several topics related to the ETF, in order to give investors a deeper understanding of it. Chuck Jaffe: One fund, on point for today. The expert to talk about it. This is the ETF of the Week!
Welcome to the ETF of the Week, where we get the latest take from Todd Rosenbluth, the head of research at VettaFi. And at VettaFi.com, you can find all the tools you need to be a savvier, smarter ETF investor, and to get more details on the new, newsworthy, trending, and timely ETFs that we discuss here. Todd Rosenbluth, great to chat with you again!
Todd Rosenbluth: It’s great to be back, Chuck!
Chuck Jaffe: Your ETF of the Week is…
Todd Rosenbluth: The State Street Utilities Select Sector SPDR ETF. XLU.
Chuck Jaffe: XLU! An oldie but a goodie! A classic! The State Street Utilities Select Sector SPDR. So, this is not new, but it is timely and maybe trendy and a little newsworthy, right?
Todd Rosenbluth: Yeah, there’s a lot of good things that are happening in the utilities sector, which is relatively small. Perhaps we’ll come back to it. But this gives you exposure to the S&P 500 utility companies. We recently saw some merger activity with NextEra Energy. We’ve seen the utility sector be in demand because of the artificial intelligence needs and spending, and the electricity that’s being used by this.
And we’re also finding that people are looking at the utility sector because of its defensive characteristics. As the market becomes more volatile, as the uncertainty [grows] about the Fed’s next move, utilities and their dividend payments are particularly appealing. So, there’s a lot going on here in this relatively small sector.
Chuck Jaffe: There’s also been good performance, but utilities are generally seen as a defensive kind of play. So, is this a defensive play, or is this, like ‘let’s play some offense’, because you consider utilities to be AI-adjacent?
Todd Rosenbluth: So — all of those things! So, it is certainly — I’ll pick on the last part of what you said — it is AI-adjacent. People tend to think of the technology sector as the primary and secondary for many people, where we’re getting exposure to the artificial intelligence theme, but utilities is a nice counterbalance to that. It has, again, more defensive characteristics, but growth.
So it is probably the more growth-oriented of those typical defensive sectors that include healthcare and consumer staples and real estate. I would think of utilities more and more as a growth-oriented area. It’s been experiencing — the sector has been experiencing — stronger earnings growth than it historically has. And yet, these are the stable companies that have consistently paid dividends for years.
So, you get a combination of that growth and those defensive characteristics in an, again, relatively small sector.
Chuck Jaffe: You also, if you’re investing with utilities, I mean — someone whose buying stocks directly would be looking at utilities for yield. In this case, ETFs pass through obligations. How good is the yield on this fund?
Todd Rosenbluth: Yeah. So I was looking at it just before coming in, roughly [a] 3% yield. So that’s above average versus the S&P 500. And it’s not as high, perhaps, as people might think, because the stocks have performed well. And so, the companies continue to pay dividends and have a good record of paying dividends. But 3% is still competitive in this environment, a good place for people who are looking for income, not just capital appreciation.
Chuck Jaffe: I said that the XLU is an oldie but a goodie. I mean, it’s one of the longer track records in the ETF world. And when it first came out, ETFs were still fairly new, and this was a sector play, and people talked about it a lot as, you know if you want to use ETFs to move in and out, lean into certain sectors, tilt your portfolio, et cetera.
It’s proven to be a long-term portfolio holding, or that sector play. So, for you, is this about adding utilities because you want that safety long-term, or is this about adding that tilt that you maybe won’t be staying with as a permanent allocation?
Todd Rosenbluth: With sector ETFs, I tend to think of them in more of a tactical manner. So, people have exposure to utilities as part of the S&P 500. It’s — I keep using the word smaller, so let’s just define that — it’s roughly 2% of the S&P 500. The technology sector is considerably larger, so is financials, and consumer discretionary. Utilities is quite small.
If you believe in both the defensive characteristics — you want a little bit of downside protection, given how well the S&P 500 has done this year — but you want some growth characteristics as well, based on the artificial intelligence theme, you could overweight that. Overweight using XLU as part of your S&P 500, and boost the exposure to 3% or 4% of your overall equity portfolio or your U.S. equity portfolio. And using XLU is a nice bolt-on.
We’ve also seen people being more comfortable in doing it as a pair trade. So, pairing this XLU with (XLK A), the technology sector SPDR, and then leaning into both those sectors — getting exposure to the growth themes through artificial intelligence, but with that, that counterbalance. So it matters how much you might want to overweight exposure.
Again, 2% is quite small. So anything that you use with XLU, any exposure to XLU directly, is going to overweight you to the utility sector.
Chuck Jaffe: The other thing about this fund — I mean, it is one of the old ones and one of the classics, but it also is one of the cheap ones! Like, if you want exposure, this is about as efficient as you can do it.
Todd Rosenbluth: You’re right. So, it’s just eight basis points from an expense ratio standpoint. The State Street Sector SPDR ETFs are known for their liquidity, the tight spreads, so your trading costs are going to be quite low regardless of whether you’re a retail investor or you’re trading in a larger size. So from a total cost of ownership, this is a great way to get exposure to the utility sector.
Chuck Jaffe: This fund came out before we had what came to be [known] as smart beta funds and things along those lines. You and I talked about a lot of newfangled — hey, here’s what has been developed, et cetera. But, the ETF industry went through this evolution of ‘okay, first we create the ETF, then we create flavors of the ETF, then we create, you know, these quasi-active ETFs, then we get to active ETFs’.
So, for you, in this case, given this industry that is pretty straightforward, et cetera, and given that we do talk about all the new stuff… Is going in a space like utilities — classic old school investor, get it there, hold it there, use it tactically if you want it to, but do it as cheaply as possible — is this a case where newfangled wouldn’t make a difference to you? You’re not interested in smart beta or something else that would be an alternative?
Todd Rosenbluth: So, utilities you’ll often find within those smart beta dividend ETFs, because of those quality, dividend-yielding characteristics. You probably also have exposure to utilities in those related ETFs. It’s important to make sure you know what you own. I doubt that anybody listening to this only owns exposure to the S&P 500. So make sure you know what you already have and how this can fit in as a bolt-on.
But if you’re looking to overweight exposure to the utilities sector, XLU is the cleanest way of doing so. The market-cap characteristics of this, in that the largest companies like NextEra Energy and Southern are the heavyweights within the portfolio, is a plus, because that’s how the S&P 500 is constructed. So, you’d want to have overweighted exposure to the largest utility companies to be able to move the needle in your broader portfolio.
I think if what you’re looking for is to tilt your portfolio in favor of utilities, XLU, which is a State Street product, is a great way of doing so.
Chuck Jaffe: The State Street Utilities Select Sector SPDR. XLU. Todd, great stuff. See you next week!
Todd Rosenbluth: Thanks a lot, Chuck.
Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe, and yes, that’s me! And you can check out my hourlong weekday show by going to MoneyLifeShow.com, or you can search for it wherever you find your favorite podcasts.
And if you’re searching for more information on exchange-traded funds, look no further than VettaFi.com, where they’ve got all the tools you need to be a better investor. They’re on X at @Vetta_Fi. And Todd Rosenbluth, their head of research and my guest here on ETF of the Week, he’s on X, too. He’s at @ToddRosenbluth
The ETF of the Week is here for you every Thursday. Follow us on your favorite podcast app to make sure you don’t miss an episode. And we’ll introduce you to another great ETF next week. Until then, happy investing, everybody!
Note: This article was created in part through assistance from AI tools. The content has been thoroughly reviewed and edited by the author.
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