This Low-Volatility Investment is Outperforming the Magnificent Seven

Quick, what’s the top performing sector so far for 2023?

Did you say the Nasdaq 100? (QQQ) - Wrong!

No, as of today, the top performing sector in the market for 2023 are the utility stocks.

That’s right, names like Duke Energy (DUK), American Electric Power (AEP), and NextrEra Energy (NEE) have accelerated right past the large cap technology dominated Nasdaq 100 performance.

As a matter of fact, the Nasdaq 100’s performance is currently sixth on the list of 2023 returns for the major sectors.

Here’s the catch, the Utility sector trades with less than half of the volatility of the Nasdaq 100.

Need another kicker?  The Select Sector Utility ETF (XLU) also pays a quarterly dividend yield of almost 3%.

All of this adds us to a sector that needs to be on your radar.  Let’s look at the why’s and where the Utility sector is heading.

Utility Stocks Have Turned into Growth Companies Due to Their AI Connection

All eyes have been on the semiconductor and cloud companies as the AI industry has exploded on to the scene.  Companies like NVIDIA (NVDA), AMD (AMD), and Alphabet (GOOGL) have all the attention.

But there’s one thing that the AI chips need in order to perform their trillions of calculations and learning… power.

According to Goldman Sachs, data centers will use 8% or more of the United State’s power grid by the year 2030.  That compares to only 3% just two years ago.

Recently, American Electric Power (AEP), Duke Energy (DUK) and other power companies announced plans to work directly with data centers to secure dedicated grids to deliver power to the growing AI industry.

This move adds a growth factor to electric companies like what has been seen in some of the largest industrial expansions in the United States.

Energy Prices Continue to Surge along with Earnings

Demand for energy from both AI and consumers has seen massive demand resulting in higher revenue.

Everything from population growth to the popularity of Electric Vehicles (both consumer and industrial) has combined for increased demand outside of the new demand for AI.

Those increases are resulting in rising revenue and profits for electric companies.

Duke Energy’s earnings report – released last week – showed revenue climbing back towards double-digit growth.  The stronger revenue resulted in the company’s strongest earnings per share beat in more than 5 years.

Then There’s the Sector Performance

As already indicated, the Select Sector Utility ETF (XLU) is at the top of the market’s performance list.

Year-to-date, the utility ETF has returned 16% compared to the Nasdaq 100 and S&P 500 performances of 10% and 12% respectively.

The outperformance is driven by growth in the industry and a feature that investors are looking for as we head into the second half of the year.

First, income.  The Select Sector Utility ETF pays a quarterly dividend that yields 2.96%.

Investors are increasingly searching for income alternatives in the market as the Fed prepares to lower interest rates in the second half of 2024.

For more than a year, investors have been able to find yields of 4-5% and higher in money market funds and other “cash” holdings.  That gravy train is already coming to an end as banks and brokerage firms are lowering the yield on these cash alternatives.

Utility stocks have been historically known as a source for low volatility income.

There’s the Second Point, Low Volatility

Over the last five years, the utility sector ETF averages 14% less volatility than the Nasdaq 100.

Today, the Utility Sector ETF is trading with 38% less volatility that the Nasdaq 100.

Combine that with the 3% dividend AND the year-to-date returns of 16% and the Utility Sector ETF becomes an incredibly attractive growth and income alternative for portfolios.

Where is the Utility Sector Heading from Here?

The trend is your friend with the Utility Sector.

The top performing companies have spent this earnings season confirming investors expectations with improving outlooks for earnings and revenue.

As a result, the Select Sector Utility ETF (XLU) is in the process of quietly moving to new all-time highs.

Sentiment towards the sector is far from overly optimistic.  Let’s face it, these are relatively boring stocks, but boring is exactly what the market is looking for as uncertainty about the economy and market valuations are starting to weigh on investors.

From a technical perspective, the XLU remains in a strong long- and short-term bull market trend.

Watch for a break above $70 to continue the low volatility rally for the XLU shares with another 10-15% of upside before the year-end.