On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research, Todd Rosenbluth, discussed the Utilities Select Sector SPDR Fund (XLU) with Chuck Jaffe of Money Life. The pair discussed several topics related to the fund to give investors a deeper understanding of the ETF.

Chuck Jaffe: One fund, on point for today. The expert to talk about it. Welcome to the ETF of the Week!

Yes. This is the ETF of the Week, where we get the latest take from Todd Rosenbluth. He’s the head of research at VettaFi, and at VettaFi.com, you’ll find all the tools you need to be a savvier, smarter investor in exchange traded funds, and to get more details on the new, newsworthy, trending, and timely ETFs that we talk about here.

Todd Rosenbluth, it’s great to chat with you again.

Todd Rosenbluth: It’s great to be back!

Chuck Jaffe: Your ETF of the Week is…

Todd Rosenbluth: The Utilities Select Sector SPDR ETF, XLU.

Chuck Jaffe: XLU, the Utilities Select Sector SPDR ETF. Todd, it’s a classic. It’s a big fund. It’s something that’s been well used and well discussed in the past. But why this fund now?

Todd Rosenbluth: So, I’m an old-school stock analyst, I actually used to run a team that included utility analysts. And utilities are sleepy, stodgy, stable cash flow, defensive equities that you would have in your portfolio as a cushion; when the broader market wasn’t rallying, it could offer a counterbalance. Not this year, not 2025. XLU is outperforming the S&P 500 this year.

It is actually a much more growth-oriented sector than certainly I, and maybe others, would have appreciated. Actually, within the S&P 500 utility stocks, there are still slow, stodgy, dividend-paying stocks. But there are also stocks that are up more than 50% this year. The ETF as a whole is outperforming the broader market. I thought it was worth taking a closer look at this very small sector of the S&P 500 and why it’s doing so well.

Chuck Jaffe: Why is it doing so well? Because, of course, you don’t think of utilities as being an AI play. But increasingly this year, they’ve been seen as AI-adjacent. So, is it the AI? Oh, there’s going to be lots of need for power. And that’s what’s driving utilities. Or is it something else?

Todd Rosenbluth: No, that’s a good part of what it is. So, the demand for AI, the data centers that are needed, the industrial electrification, which has changed the sector and made it more growth-oriented, that’s a key part of it. And then even the stocks that are the slow, stodgy, defensive ways to get exposure in a falling rate environment, the stability of dividend payments from some of those old-school utilities are appealing.

But companies like NRG Energy — the ticker is NRG — or Constellation Energy — the ticker on that is CEG –those are disproportionately benefiting from their nuclear and their independent power production efforts, and that’s been a key driver for it. But we also have seen some success, or the ETF has seen some success, from the more traditional regulated utilities that offer an above-average yield.

Chuck Jaffe: How much of this to you is the growth play? How much of this is the yield play? Because this is an ETF that last time I checked was delivering somewhere between two and a half and about 3% in yield.

Todd Rosenbluth: Right. So, it still is yielding close to 3%. Now, that may not sound like a lot, but the S&P 500 is actually yielding only 1%. Because stocks in the stock market have rallied again, double-digit percentages. I think this is the third — no, not I think, I know — it’s the third year in a row that we’ve seen double-digit percentage growth for the S&P 500.

Dividends are not growing anywhere near as fast. So, companies that pay the dividend tend to raise the dividend low to mid-single digits on a typical basis. So the yield has shrunk. So I think the appeal for utilities this year has been a combination of growth and income. And historically, I would have thought of a sector like healthcare that might have had that.

So healthcare, you’ve got these slow, stodgy pharmaceutical companies, and hospitals perhaps, that are paying a stable dividend. And then you’ve got biotechnology, some of those that are paying a dividend, but a small one at that, that are more growth-oriented. Utilities has morphed into that. So this is now a hybrid, and XLU is a good way to get growth and income this year.

And we’ll see if that continues as we head into the new year.

Chuck Jaffe: From a diversification standpoint, you think utilities, you think you’re talking about these big old stodgy names. You’d be thinking large-cap, et cetera. But functionally, if you put together a portfolio of utility companies, you’re going to wind up dealing with what amounts to a mid-cap fund. This has been a large-cap rally. Does this diversify you, in your opinion, on cap sizes as well as on sectors? And how much do you let any sector fund be in a portfolio?

Todd Rosenbluth: So, that’s a couple of things in there. Let me break that apart. So, XLU is a market-cap-weighted ETF. And so it takes all of the stocks that are in the S&P 500 within the utilities sector and then ranks them in order. So the largest companies, like Constellation Energy is one of those. I think NextEra Energy is the largest position.

Those are going to be disproportionately larger within the portfolio. But even the smallest utility in the S&P 500 is going to have a meaningful weight, as opposed to what you would have within the broader S&P 500. And utilities is a really small sector within the S&P 500. I believe it’s around a 2, 2.5% weighting. So, you start with information technology; that’s north of 30%. You got to work your way down. So, people have exposure to utilities within a broadly diversified portfolio, but in a very small stake. So, I think it could make sense. And certainly this year it would have made sense to overweight your exposure to utilities. If you had done so, you’d be out… If you just own the S&P 500 and then you owned XLU in combination, not equal weighting of those two, you would have outperformed.

Will you continue to do so? I don’t know. That’ll be determined in 2026. My crystal ball is a little bit foggy as it relates to that. But we have seen that many advisors and investors will take a core part of the portfolio, like an S&P 500-based ETF—I think we might have talked about SPLG from State Street; it is a low-cost version of the S&P 500 at just two basis points—and you could add 1 or 2 sectors to overweight.

Your exposure actually is the utility sector if you want to match up to the S&P 500.

Chuck Jaffe: And we should point out it’s also low cost because the expense ratio here is under ten basis points.

Todd Rosenbluth: That’s right. So it’s a great way to get diversification. You hold a good number of stocks, a few dozen utility stocks that are part of the S&P 500. The fee is just eight basis points. That’s pretty cheap. And this is a relatively large, very liquid ETF that trades quite frequently. So if you’re concerned about the spreads, you don’t need to be with XLU.

It tends to be quite tight. So from a cost standpoint, this is a compelling way to get exposure to the utility sector in a diversified manner, instead of owning 1 or 2 stocks that tend to be performing well.

Chuck Jaffe: Now you’re looking at this because it’s hot, relatively speaking, and it’s been performing well, but you’re not a trend follower, etc. So what would be the point? If somebody is going to buy this, what would they be looking for? That might be the “okay, and now its time is up because it’s the ETF of the Week.” They’re going to hold it for a lot longer than a week if they buy it.

But what would be the thing that you would say: go into this knowing that if this changes or that changes, maybe it’s time to tilt your portfolio in a different direction?

Todd Rosenbluth: Yeah. So, I think when you’re doing sector overweighting, I guess not necessarily underweighting… no, we’re not recommending someone shorting an ETF. If you’re doing sector overweighting, you’re probably picking a couple of them that you think are well positioned to go into a period of time. And I think it’s probably reasonable to do something and look at it every few months and see if those sectors, from a fundamental standpoint, still are appealing.

So, right now, the growth opportunities for the AI-adjacent companies, the nuclear energy-related companies, look strong. We’ll see if those individual companies continue to perform well. We’ll see if the stability of our utilities continues to do well. But this might not be the growth-oriented sector you want to focus on going forward.

So you could pair this with technology, for example. Now, and then you might not want to stay with that a few months later because there are other more growth-oriented sectors that are more appealing.

Chuck Jaffe: But for now, if nothing else, XLU, the Utilities Select Sector SPDR, is the ETF of the Week. Todd, always great stuff when we get a chance to catch up! Look forward to doing it with you again next week!

Todd Rosenbluth: Sounds great, Chuck. See you soon.

Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. And yes, I’m Chuck Jaffe. It’d be great if you would check out my hour-long weekday podcast on your favorite podcast app, or by going to MoneyLifeShow.com.

Now, if you want to check out your favorite ETFs, or maybe your next favorite, or just the ETF of the Week, there’s no better place to do that than VettaFi.com, where they have a full suite of tools that will make you a better investor. They’re on X at @Vetta_Fi, and Todd Rosenbluth, their Head of Research, my guest, he’s on X as well, at @ToddRosenbluth.

The ETF of the Week is here for you every Thursday. Next week is Thanksgiving week, so we will be here a day ahead of time for that. Make sure you don’t miss an episode whenever it’s going to be by following along on your favorite podcast app.

And until we’re back next week, 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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