Utility stocks have long been the definition of “boring is beautiful.” And utility ETFs have long been the preferred way to get broad exposure to that snoozy goodness.
The former is changing. For decades, utility stocks were merely the regulated electric, gas, and water utility companies that have fulfilled our most basic needs. These pseudo-monopolies had little to no competition, but could only raise rates slowly over time, so while their stocks provided little growth, they were a dependable source of portfolio stability, as well as high (and growing) dividend income. But over the past few years, the business environment has shifted, and utilities … well, as I’ll get into, they’re not your parents’ utilities anymore.
The latter, however, remains the same. Investors who can’t or don’t want to pick individual stocks can still rely on utility ETFs to provide them with exposure to dozens of equities across the sector—allowing them to enjoy the income and defense while defraying a little more risk from these already lower-risk stocks.
Today, I’m going to introduce you to three of the best utility ETFs you can buy. While all utility funds have a few things in common—primarily, they all hold … well, utility stocks—each fund is built a little differently from one another. The following three “ute” ETFs, then, have been selected for the different ways in which they let you tap the utility sector.
Disclaimer: This article does not constitute individualized investment advice. These securities appear for your consideration and not as personalized investment recommendations. Act at your own discretion.
Why Utility Stocks (Once Upon a Time)?
Utility stocks are often lumped together with consumer staples and health care stocks. That’s because all three sectors deliver basic goods and/or services that people simply can’t go without—thus, even if the economy goes into the toilet, people might cut back spending in other areas, but they’ll do everything they can to keep from cutting back on prescriptions, toilet paper, and the electric bill.
Edward Jones Investments breaks down the buy case in a research paper:
“Utilities tend to pay a relatively high percentage of their earnings to shareholders in the form of dividends. In many cases, utility dividends grow slowly over time. This growing stream of income can help investors reduce the impact of inflation.
“Additionally, utilities display defensive characteristics since most customers view their services as essential. For that reason, we believe that traditional regulated utilities are among the companies least affected by changes in the health of the economy.”
Why Utility Stocks Today?
Utility stocks still largely provide those defensive properties, but over the past few years, evolutions to the space have given the sector more growth spark than usual.
For one, the sector has been transitioning from fossil fuels to clean energy, which for years gave utility companies the added bonuses of additional political and regulatory support. Of course, this strength is quickly vanishing under the new presidential administration.
But taking its place is utilities’ importance amid the rise of artificial intelligence (AI).
“Artificial intelligence has now touched nearly every aspect of life. And, as it turns out, powering AI applications requires a lot of energy,” James Dorment, Co-Head of Fundamental Research and Portfolio Manager at Voya Investment Management, said in a 2024 research paper. “U.S. data centers currently consume as much electricity as all households in New York and Florida combined. With the rapid adoption of AI and development of AI-powered data, this consumption is projected to nearly triple by 2035, matching the combined usage of New York, Florida, Texas, and California households. …
“As technology advances and new AI chips are developed, power consumption is expected to rise further. This burgeoning demand for electricity is transforming the power sector and propelling utilities toward significant growth.”
To be clear: Utilities’ newfound tether to AI is a double-edged sword. If the reality of artificial intelligence doesn’t live up to expectations—if the technology falls flat on growth estimates, and thus the necessary infrastructure around it isn’t as robust—this fresh tailwind could start blowing back against the sector.
Related: Retired But Too Young for Medicare? Health Insurance for Early Retirees
The Best Utility ETFs
If you’re investing in utility stocks solely for this growth potential, it might behoove you to invest in one or two stocks that are uniquely positioned to take advantage. Many utility companies found in your average ETF might have marginal to no upside from AI’s expansion.
However, if you’re interested in the sector’s defensive properties, whether in part or in whole, utility ETFs are likely the way to go. Utility ETFs are well-diversified across the sector, providing the exposure you want without the risk of a single utility-company failure blowing up your whole portfolio.
The following are three of the best utility ETFs you can find.
1. Utilities Select Sector SPDR Fund
- Inception: Dec. 19, 1998
- Assets under management: $18.9 billion
- Dividend yield: 2.8%
- Expense ratio: 0.08%, or 80¢ per year on every $1,000 invested
The Utilities Select Sector SPDR Fund (XLU) is the oldest, biggest, and—thanks to a 2025 fee reduction—cheapest utility ETF on the market.
The XLU is as straightforward as it gets. This index fund holds all of the utility stocks in the S&P 500. That’s it. Like the S&P 500 itself, XLU is market cap-weighted, so the larger the company, the greater the percentage of assets invested in that company. So, for instance, $145 billion NextEra Energy (NEE) is the top holding at more than 11% of assets, while $7 billion AES Corp. (AES) is the smallest holding at just 0.6%.
To prevent hyper-concentration in one or a few stocks, XLP’s index also has a couple of “caps” that ensure after each quarterly rebalancing: a.) no single stock makes up more than 25% of the index, and b.) the total weight of companies with individual weights greater than 4.8% doesn’t exceed 50% of the total index weight.
XLU is hardly perfect. By virtue of excluding any utility companies that trade outside of the S&P 500, XLU has one of the smallest holdings lists among indexed utility ETFs, at just 31 companies right now. That, combined with the market cap weighting system, leads to sizable concentrations. Just four stocks—NextEra, Southern Co. (SO), Constellation Energy (CEG), and Duke Energy (DUK)—account for a little more than a third of the fund’s assets. It also means you’re lacking exposure to potentially higher-growth small-cap utility companies.
But broadly speaking, high concentrations in larger companies tends to result in more stable performance. Also, this is the utility sector—there’s far less differentiation among these companies, which operate in just a narrow handful of businesses, than there are among the components of most other sectors.
The Utilities Select Sector SPDR Fund has long been one of the best utility ETFs to buy, but for different reasons. XLU started acquiring assets by being the only game in town, and over time was the most attractive player because it was the biggest game in town. However, on Jan. 31, State Street Global Advisors reduced the net expense ratio on its Select Sector funds—so now, XLU is also the cheapest game in town, at an annual expense ratio of just 0.08%.
Want to learn more about XLU? Check out the State Street Global Advisors provider site.
2. Invesco S&P 500 Equal Weight Utilities ETF
- Inception: Nov. 1, 2006
- Assets under management: $458.4 million
- Dividend yield: 2.4%
- Expense ratio: 0.40%, or $4.00 per year on every $1,000 invested
Investors have thrown several billion dollars at a number of other utility ETFs that follow indexes that, while built a little differently from XLU, ultimately provide pretty similar exposure and almost identical returns.
There’s nothing wrong with them, per se—they’re just slight variants on XLU that cost a hair more.
If you want truly different exposure to the utility space, you might instead want to consider the Invesco S&P 500 Equal Weight Utilities ETF (RSPU), which holds … OK, this is a little embarrassing, but it holds the exact same 30 or so stocks that XLU does.
But how RSPU holds those stocks makes an enormous difference!
Invesco’s utility ETF tracks the S&P 500 Equal Weight Utilities Plus Index, and the key words there are “equal weight.” Unlike XLU and other copycat funds, where bigger stocks have more pull, RSPU gives the same weight to each stock every time the ETF rebalances, which is quarterly.
Depending on how each stock performs, their weights might change throughout the quarter—for instance, NRG Energy (NRG) is weighted at 5% now, Vistra (VST) is around 4%, and DTE Energy (DTE) is around 3%—but every three months, they’ll all be brought back to the same weight, and the dance will begin anew.
Equal weighting typically reduces concentration in a handful of stocks. Top-10 holdings usually account for 60% or more of the assets of many market cap-weighted utility index funds, but they only account for about a third of RSPU’s assets.
But more importantly, equal weighting also tends to reduce emphasis on the larger companies in an index while giving smaller companies more say in performance. For instance: Even though XLU and RSPU hold the same exact companies, the former’s average weighted market cap (which accounts for the assets allocated to each stock) is about $50 billion, while the latter’s is just $33 billion.
This higher reliance on small caps has led to a slightly lower yield than other utility index funds, but much better performance. On a total-return basis (price plus dividends), RSPU has beaten XLU and the category average over every meaningful time frame—and by well more than enough to justify its relatively elevated fees.
Want to learn more about RSPU? Check out the Invesco provider site.
3. Virtus Reaves Utilities ETF
- Inception: Sept. 23, 2015
- Assets under management: $484.2 million
- Dividend yield: 1.3%
- Expense ratio: 0.49%, or $4.90 per year on every $1,000 invested
The vast majority of the market’s utility ETFs are index-based. However, if you prefer to put skilled human managers on the case, you can do so via the Virtus Reaves Utilities ETF (UTES).
And even if you prefer index funds, you might want to consider Virtus’ actively managed product.
Managers John Bartlett, Joseph Rhame III, and Rodney Rebello have built a portfolio with many of the same names you’ll see in an index ETF—Vistra, NextEra, and Xcel Energy (XEL) among them. The primary difference is just how tight the portfolio is: a mere 20 stocks at the moment.
There’s no weighting system here. The portfolio managers allocate assets at their own discretion, and Virtus’ trio is more than comfortable with high concentrations. VST and CEG, for instance, collectively account for 25% of assets, and nearly three-quarters of the fund’s assets are wrapped up in the top 10 holdings. Average weighted market cap is even smaller than XLU and RSPU, at $29 billion.
That has translated into even less income—UTES currently only yields as much as the S&P 500—but stellar returns nonetheless. UTES isn’t yet old enough to have a trailing 10-year performance figure, but it’s the absolute best utility ETF by performance over the trailing one-, three-, and five-year periods … and by a large margin, to boot.
Most of that outperformance has come more recently as the fund’s concentrated bets have really paid off. Just understand that this upside potential also comes with higher risk than your average index fund should any of UTES’ largest holdings fall out of favor.
Want to learn more about UTES? Check out the Virtus Investment Partners provider site.
