Key Points
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Interested in Utilities Select Sector SPDR Fund? Here are five stocks we like better.
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The Utilities Select Sector SPDR Fund fell to a 52-week low near $39 amid rising Treasury yields but has since bounced nearly 5% to trade above $41.
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NextEra Energy, XLU’s largest holding, carries a Moderate Buy rating and roughly 28% implied upside, offering a higher-risk, higher-reward recovery play.
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Southern Company, XLU’s second-largest holding, offers a 3.5% dividend yield and low beta of 0.31, providing a steadier option with about 16% implied upside.
The utilities sector just went through one of its roughest stretches in years, and for a sector built on stability, the sell-off may have caught many income investors off guard. The Utilities Select Sector SPDR Fund (NYSEARCA: XLU) tumbled to a 52-week low near $39, leaving the group more beaten down than it has been in almost three years. But something has shifted over the past several sessions. XLU has bounced nearly 5% off that low, trading back above $41, and the price action is starting to look like a bottom is forming.
Why Rising Bond Yields Hurt Utilities
To understand the bounce and potential bottom, you first have to understand the sell-off. And ultimately, it comes down to one thing: bonds and yields. Utilities are classic safe-haven, income-generating investments. People own them for their steady, reliable dividends. But when Treasury yields climb, as they have for much of this year, those government bonds start to look far more attractive by comparison. Why own a utility yielding 3% with business and equity risk attached when you can lock in a 20- or 30-year Treasury at a competitive rate with the full backing of the U.S. government?
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That dynamic has pulled income-focused capital out of utilities and into bonds, hitting the sector hard. Many utilities also carry substantial debt to fund infrastructure, so rising rates squeeze their borrowing costs, too.
The Key Level to Watch
That recent low near $39 is now the sector’s all-important line in the sand. It marks the level the bulls must defend, and so far, it has held firm, with XLU bouncing sharply off it.
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For the downtrend to fully break and momentum to shift, though, more work is needed. Next, XLU needs to firm up above its 20-day moving average, confirm a higher low, and break the downward structure that has defined the chart for months. Notably, this bottom attempt is happening even though the bond and yield situation has not fully resolved, and no definitive bottom has been established there yet. That suggests utilities may be trying to get ahead of a yield turn. If bonds do find their footing in the weeks ahead, utilities could have significant room to recover. And two of the sector’s largest names are worth watching closely for clues and momentum shifts.