Investors Eye XLU: Utilities ETF Seen as Defensive, AI-Adjacent

According to VettaFi head of research Todd Rosenbluth, the State Street Utilities Select Sector SPDR ETF (XLU) provides exposure to S&P 500 utility companies and currently yields about 3% while charging a 0.08% expense ratio.

Rosenbluth pointed to several factors drawing attention to the fund: recent merger activity involving NextEra Energy, rising electricity demand tied to data centers and artificial intelligence infrastructure, and investor interest in dividend income amid uncertainty over the Federal Reserve’s next policy steps.

The ETF is market-cap weighted, so the largest utility companies-including NextEra Energy and Southern Company-hold the biggest shares of the fund. That structure gives investors a way to increase exposure to the largest utility names within the S&P 500.

XLU’s yield is above the S&P 500 average but has not risen sharply because utility stocks have performed well. Rosenbluth described utilities as having defensive characteristics while showing stronger-than-historical earnings growth, and he listed pairing XLU with a technology sector ETF as one way to gain AI exposure while offsetting volatility.

He noted that utilities represent roughly 2% of the S&P 500, so adding XLU can raise that allocation to roughly 3% or 4% of an equity portfolio. Rosenbluth added that the fund’s liquidity and tight trading spreads, common to State Street sector SPDRs, reduce trading costs for both retail and larger investors. “It’s just eight basis points from an expense ratio standpoint,” he said.

Rosenbluth also advised investors to check existing holdings for overlap because utilities often appear in dividend-focused and quality-oriented ETFs. XLU is presented as a straightforward, low-cost option to overweight the utility sector if an investor seeks targeted exposure to large utility companies.