The utilities sector shows resilience in an environment of power surges

A major player in the world of Exchange Traded Funds (ETFs) has been making headlines for its recent relative strength: the SPDR Utilities Select Sector Fund NYSEARCA: XLU. It has held its ground well this year, posting gains of nearly 5% so far. Lately, however, it has reached the broader market, showing impressive strength compared to other sectors.

The recent exceptional performance is interesting, especially when considering tensions in the Middle East and rising oil prices. Investors are shifting their focus toward utilities, possibly reallocating capital away from bets on higher growth in semiconductors and technology.

Despite the recent downturn in the overall market, which saw a decline of around 3% over the past month, XLU has been on an upward trajectory, gaining nearly 4%. The contrast is stark when comparing the charts: while the market trend (orange) has been down, XLU’s trend has steadily risen, demonstrating its impressive relative strength and resilience. To see it for yourself, simply click the “+” symbol on a chart.

So, will the sector continue to outperform or could it be short-lived? Let’s take a closer look at the sector as a whole, what analysts are saying, and its top holdings.

Analysis of the Utilities sector

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 adopts a passive investment approach to mirror the investment performance of the index.

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%, Multi-Utilities 27% and Water Utilities 2.4%. Analyst ratings for holdings within XLU indicate an aggregate hold rating based on 292 analyst ratings covering 30 companies, representing 99.9% of the portfolio. The aggregate price target for these holdings is $69.35, with a range of $58.95 to $79.53 for the same 30 companies.

From a technical analysis perspective, XLU recently broke its downtrend on a longer time frame, suggesting a change in momentum. As mentioned, the sector has recently outperformed the overall market. The XLU is now trending above its downside resistance and major simple moving averages (SMA). This price action and setup is exceptionally bullish for the sector and suggests a significant shift in overall trend and momentum, in favor of the bulls.

Evaluation of the ETF’s main holdings

While technical analysis offers valuable insights, it is crucial to also consider the ETF’s more weighted holdings, as they play a significant role in shaping its overall performance. So let’s take a closer look at the top three holdings of XLU: NextEra Energy NYSE: NO, equal to 13.7% of the total weight; Southern Company NYSE: SOat 7.93%, and Duke Energy NYSE: United Kingdomat 7.68%.

NEE’s impressive performance has certainly helped the entire sector push higher in recent weeks. The leading sector ETF position rose more than 7% in the previous month and more than 16% in the previous three months. With a market capitalization of $136 billion and expected earnings growth of 7.35%, the utilities giant has a Moderate Buy rating and expected upside of 7.5%.

SO, XLU’s second-largest holding, has performed in line with the sector and the broader market this year, while owning an impressive 3.79% dividend yield. Notably, the stock recently broke above its previous high from earlier in the year and is now approaching a multi-year resistance area near $75. If SO can push and hold above that zone, there could be momentum for SO and the entire industry.

DUK, the ETF’s third largest holding, is also moving above major rising SMAs. However, DUK presents a more intriguing setup that could boost the sector’s momentum if it continues. The DUK has formed a base on a higher time horizon and is steadily approaching a major potential downturn area near $100. If the stock breaks above this level, the upside momentum could be explosive.

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