Key points
- XLU has lagged the overall market, gaining nearly 1% year to date, but is showing signs of changing momentum as it consolidates above previous resistance.
- The technical setup suggests a possible shift in momentum, so investors should monitor key resistance levels and top holdings for potential opportunities.
- Major holdings such as NEE, SO and DUK play a vital role in XLU’s performance. Each presents unique technical and fundamental patterns, offering investors valuable insights into the potential trajectory of the sector.
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In the world of Exchange Traded Funds (ETFs), the SPDR Utilities Select Sector fund New York Stock Exchange: XLU it remains a significant player, although it has posted a modest performance this year, with gains of nearly 1% year to date. Despite this, XLU displays interesting technical signals, suggesting a potential breakout and change in momentum that investors should monitor closely.
Understanding the XLU
The XLU seeks to track the price and yield performance of the Utilities Select Sector of the S&P 500 Index, which includes electric utilities, multi-utilities, independent power producers and gas utilities. The fund aims to mirror the investment performance of the index by adopting a passive investment approach.
The ETF focuses primarily on U.S. exposure, with 99.8% of its assets allocated domestically. Within its subsector exposure, Electric Utilities represents 59.1%, while Multi-Utilities represents 27%. Analyst ratings for holdings within XLU indicate an aggregate hold rating based on 275 analyst ratings covering 30 companies, representing 99.8% of the portfolio. The aggregate price target for these holdings is $69.39, with a range of $58.33 to $81.91 for the same 30 companies, which make up 99.8% of the portfolio.
Technical analysis and potential breakout
From a technical analysis perspective, XLU has shown sustained consolidation within a narrow range, signaling the potential for a significant breakout and shift in momentum. Currently hovering near downside resistance and converging SMAs, especially the 200-day SMA, the ETF appears poised for a notable upward move.
A breakout and extended hold above the $65 mark, accompanied by robust volume and time spent above resistance, could mark a pivotal moment for XLU on a higher time horizon. Such a move would likely attract traders and investors, potentially pushing the ETF towards expected resistance levels of around $68 and $70.
Valuation of major holdings
While technical analysis provides valuable information, it is essential to consider the ETF’s most heavily weighted holdings, which significantly influence its overall performance. Notably, XLU’s top three holdings include NextEra Energy NYSE: NO with a weight of 15.06%, Società del Sud NYSE: SO at 8.03% and Duke Energy NYSE: United Kingdom at 7.33%.
Understanding the fundamentals and technicals of these heavyweight holdings is critical to evaluating XLU’s performance. Factors such as dividend yield, financial metrics, analyst ratings, and technical setups of these companies can have a substantial impact on the ETF’s trajectory.
NEE, the ETF’s top holding, recently broke its downtrend and was last trading near its 200-day SMA. The stock is a highly rated stock with a dividend yield of 3.33%. NEE has a Moderate Buy rating and consensus price target, predicting upside of nearly 18%. The company trades at a modest valuation of 17.11 P/E and has an earnings growth projection of 6.4% for the full year ahead.
Southern Company, the ETF’s second largest holding, recently recovered from its 200-day SMA and has taken time to consolidate above it. Significant resistance for SO now lies near $71 and $73. If the stock can break above these prices, it will likely significantly affect the ETF and the sector. SO has a dividend yield of 4.01% and expected earnings growth of 7.5%.
Duke Energy rounds out the top three holdings. Like SO and the sector in general, DUK stock recently reclaimed its 200 day and is approaching significant resistance and a potential inflection area near $96. DUK has a dividend yield of 4.33%, expected earnings growth of 6.02%, and a Moderate Buy rating with a consensus price target of nearly 6% upside.
While XLU has performed relatively modestly year-to-date, its technical setup suggests the potential for a significant breakout and shift in momentum in the near future. Tracking key levels and top holdings can provide valuable information to investors looking for opportunities in this sector.
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