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ETF Specialist

A Low-Cost, High-Yielding Equity Sector ETF

In a low-rate environment, this large, liquid ETF, which holds the biggest U.S. utilities firms, could offer some appeal.

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For investors seeking broad exposure to defensive, high-yielding United States utilities companies,  Utilities Select Sector SPDR (XLU) is a strong, appealing option. This low-cost exchange-traded fund contains only mid- and large-cap U.S. utilities firms, as it only holds companies that are included in the S&P 500. That means it owns more-stable utilities. The fund follows a market-cap-weighting scheme, where larger companies tend to hold more sway. Over time, that has led to mixed performance. During periods when large- and mid-cap names outperform smaller-cap ones, this fund does better than an equal-weight option, while during periods where small- and mid-cap names tend to outperform larger utilities names, an equal-weight utilities ETF would perform better.

XLU's holdings include regulated utilities, diversified utilities, and unregulated power generators. Many utilities firms are known for their reliability and income generation. This ETF is suitable as a satellite holding for a diversified equity portfolio, given that the utilities sector makes up only about 3% of the S&P 500. The fund also can serve as a tactical bet on low interest rates and long-term growth in electricity demand.

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Robert Goldsborough does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.