Here's an interesting chart that someone on Twitter posted (I recreated it on Morningstar).
It shows that since inception, the Utility Sector SPDR (XLU) has outperformed the S&P 500 since XLU's inception. It looks like it has been outperforming far more often than not actually. The utility sector is of course known for higher yields and lower volatility so it is kind of surprising to see the XLU has outperformed.
Low volatility is of course a factor way to invest in a broad equity index like momentum or value, plenty of fund providers offer low vol funds like Invesco S&P 500 Low Volatility ETF (SPLV) or the iShares MSCI Minimum Volatility ETF (USMV). Both have had stretches of outperformance but lagged MCW S&P 500 in aggregate over the last ten years, they do track closely. The low volatility factor is absolutely valid but like any factor or strategy it cannot always be best.
SPLV and USMV lag slightly over the long term but XLU outperformed. Of course there's a story there that becomes pretty apparent once you look under the hood which is that XLU's largest holding is Next Era Energy (NEE). Here's the above chart with NEE added in.
I've owned NEE for clients since 2004 or 2005 when it was still FPL Group which stood for Florida Power & Light. Florida seemed like it would grow relative to the country due to an aging population which is good for the regulated utility part of the business with its early adoption of alternative energy sources being a potential kicker for growth. That was the thesis and it seems like it is still in tact.
ETF.com shows NEE as the largest holding in XLU at 16.34% versus 7.82% for second largest holding Duke Energy (DUK). When I first bought FPL way back then it was certainly a top ten holding, probably top five but not the largest and now it is the largest by a mile.
Going forward I don't know what expectation anyone should have about XLU's performance versus the broad market but as someone still holding NEE I don't expect a repeat of the last 15 years. The only way I'd expect utilities to generally outperform would be if the S&P 500 really struggles which certainly could happen, then XLU's typical attributes of lower vol and higher yield could certainly be a difference maker. If stocks generally do well then I'd guess the only way XLU outperforms would be if some other top ten holding went on a run like NEE did.
Analyzing performance attribution isn't always this simple but I think it productive to try to understand why something that shouldn't outperform does and vice versa. The circumstances of XLU's outperformance isn't really catalyst for going heavy into the sector. Have exposure if you go narrower than broad index funds, sure, I obviously do. Go overweight if you want but I'm pretty sure there's no silver bullet here.
2 comments:
My father worked for FPL for about 40 years. The stock held was a 3% contribution based on salary from the company over a long period of time, maybe 25 years. When he retired, the dividend income was a major contribution to his retirement. My mother held the stock until passing two years. It comprised the majority of her net worth by that time, and provided more than 50% of her disposable retirement income. Better to be lucky than smart sometimes. You often have stated that out of a portfolio, a few a better than average, a few worse, and one or two winners can make for a nice return.
Very good outcome! One of several examples of serious long term compounding and ergodicity. Obviously not all individual holdings work out as well but not impossible to find either.
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