Utilities Select Sector SPDR Fund

XLU

Market cap $22.8B

As AI-fueled gains spark bubble warnings, investors are eyeing defensive ETFs in consumer staples, utilities and healthcare for safety.

Evergy, Danaher, Quanta, and Kinetik are all set to deliver big, Citi analysts calculate.

Discover the five rules I use to find stocks that are positioned to potentially pay me growing dividend income for life. I share some of my top dividend machines that are core to my effort to retire on dividend income. I share how I use these picks to build a complete portfolio.

The US stock market is highly concentrated, with technology and tech-related stocks now comprising about 55% of total market cap. This concentration justifies higher valuation multiples for SPY, as tech companies have stronger margins and more stable earnings than defensive sectors. There is a stark divergence in performance between speculative tech ETFs like ARKK and CHAT versus defensive dividend ETFs such as SCHD and VNQ.

ETFs like XLK, XLU, and XLF offer diversification and sector strength to help investors brace for Q4 market uncertainty.

The Utilities Sector ETF is attractively valued after a recent price drop, trading at a significant discount to the S&P 500. XLU offers above-average revenue and earnings growth, fueled by strong electricity demand and the AI infrastructure buildout, surpassing S&P growth forecasts. Utilities provide defensive benefits and recession resistance, making XLU well-positioned to outperform if the economy weakens or interest rates decline further.

Utilities have always had a reputation for being a "sleepy" corner of the stock market. Steady, predictable dividend payers one bought late in the bull market to preserve a portfolio.

The Federal Reserve recently cut its benchmark short-term interest rate by 25 basis points. The central bank cited slowing economic growth, notably on the jobs front.

AI's energy-hungry data centers are fueling a surge in utility ETFs, with funds like XLU, VPU, IDU, and FUTY outpacing sector growth.

Current market conditions reflect irrational exuberance, with surging valuations in stocks, precious metals, crypto, and collectibles reminiscent of past bubbles. Conflicting economic signals persist: inflation data is mixed, the labor market is weakening, but affluent consumer spending and bank lending remain resilient. Dividend growth investing remains my preferred strategy, with a focus on high-quality REITs, utilities, and my favorite cash equivalent ETF.