Investors looking to participate in a new growth phase for electricity demand by purchasing the Utilities Select Sector SPDR ETF (XLU) might be discouraged by its massive run over the past year. We'll review a way to play it with options that adds a buffer of protection. Overall electricity demand in the country is entering a new phase of growth.
Only 6.9% of the current vehicle fleet in the U.S.
is electric. While a 50% target by 2030 may be ambitious, EVs will likely outnumber internal combustion engine vehicles in less than a decade. Due to AI, farm and construction equipment will also likely become electric, and data centers are entering a new growth phase.
And so since the October 2, 2023 lows, the XLU total return has been greater than 43% (exceeding the S & P 500 total return by more than 10.5%). XLU .
SPX mountain 2023-10-23 Utilities Select Sector SPDR Fund since October low Despite this strong performance, the utilities select sector index still trades at just over 19 times forward earnings, a much cheaper multiple than the S & P's 23.5 times, and typically trades with significantly lower volatility as well. Of course, the Fed's half-point rate cut signals a more aggressive policy response, which benefits XLU in two ways.
Spurring the economy will likely increase demand, but lowering rates improves the relative attractiveness of utilities for fixed-income investors as well. The trade XLU has an annual dividend yield of 2.8% and would make a fine addition to one's por.