Power Surge: Utilities Sector's Resilience Shines

One standout player in the exchange-traded funds (ETFs) world has been making waves for its recent relative strength: the Utilities Select Sector SPDR Fund NYSEARCA: XLU. It's been holding its ground well this year, clocking in gains of almost 5% so far. Lately, however, it's caught up with the broader market, showing impressive strength compared to other sectors.

The recent standout performance is interesting, especially given the tension in the Middle East and the rise in oil prices. Investors are shifting their focus towards utilities, possibly reallocating capital away from higher growth bets in semiconductors and tech.

Despite the recent downturn in the overall market, which has seen a drop of approximately 3% in the last month, XLU has been on an upward trajectory, gaining almost 4%. The contrast is stark when you compare the charts: while the market's (orange) trend has been downward, XLU's has steadily climbed, showcasing its impressive relative strength and resilience. To see this for yourself, simply click on the “+” symbol on a chart.

So, will the sector continue outperforming, or might it be short-lived? Let's look closer at the overall sector, what analysts are saying, and its top holdings. 

Analysing the Utilities Sector

The XLU aims to track the price and yield performance of the S&P 500 Index's Utilities Select Sector, which comprises companies from electric utilities, multi-utilities, independent power producers, and gas utilities. The fund employs a passive investment approach to mirror the index's investment performance.

The ETF primarily focuses on U.S. exposure, with 99.8% of its assets allocated domestically. Within its subindustry exposure, Electric Utilities account for 59.1%, Multi-Utilities comprise 27%, and Water Utilities account for 2.4%. Analysts' 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 spanning from $58.95 to $79.53 across the same 30 companies.

From a technical analysis perspective, the XLU has recently broken its downtrend on a higher timeframe, suggesting a shift in momentum. As mentioned, the sector has recently outperformed the overall market. The XLU is now trending above its downtrend resistance and major key Simple Moving Averages (SMAs). This price action and setup are exceptionally bullish for the sector and suggest a significant overall trend and momentum shift, favoring the bulls.

Assessing the ETF's Top Holdings

While technical analysis offers valuable insights, it's crucial to also consider the top-weighted holdings of the ETF, as they play a significant role in shaping its overall performance. So, let's take a closer look at the three main holdings of the XLU: NextEra Energy NYSE: NEE, comprising 13.7% of the total weighting; Southern Company NYSE: SO, at 7.93%, and Duke Energy NYSE: DUK, at 7.68%.

NEE's impressive performance has certainly helped the overall sector push higher in recent weeks. The sector ETF’s top holding has climbed over 7% in the previous month and over 16% in the previous three months. With a $136 billion market capitalization and projected earnings growth of 7.35%, the utility giant has a moderate buy rating and forecasted upside of 7.5%.

SO, the second-largest holding of the XLU, has performed in line with the sector and overall market this year while possessing an impressive 3.79% dividend yield. Notably, the stock recently took out its previous pivot high from the beginning of the year and is now approaching a multi-year area of resistance near $75. If SO can push above and hold above that zone, momentum could occur for SO and the overall sector. 

DUK, the ETF’s third top holding, is also trending above rising key SMAs. However, DUK presents a more intriguing setup that might boost the sector's momentum if it follows through. DUK has formed a base on a higher timeframe and is steadily approaching a major potential inflection area near $100. Should the stock break above this level, momentum to the upside might be explosive.