Utility sector funds gain as data center power needs lift valuations above historical norms amid lower interest rates.
Utility-focused ETFs have climbed 8% year-to-date, driven by surging demand for power from artificial intelligence data centers. The Utilities Select Sector SPDR Fund (XLU) trades at 23x earnings, above its 17x historical average, as investors bet on AI-related growth in the sector.
The Federal Reserve’s 75 basis point rate cut late last year reduced financing costs for capital-intensive utilities, improving the appeal of regulated dividend streams. However, the 10-year Treasury yield remains elevated at 4.54%, complicating the outlook for yield-sensitive sectors.
Funds like Vanguard Utilities ETF (VPU) and Invesco S&P 500 Equal Weight Utilities ETF (RSPU) offer diversification, while XLU’s 2.6% dividend yield remains a key draw despite valuation concerns.