Utility ETFs Scaling New Highs Amid Middle East Crisis

Sweta Killa
5 min read

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Amid intensifying tensions in the Middle East, the utility sector, which has become investors' new hot spot this year, continued its solid rally. This is especially true as the sector, being considered as defensive, is making the most of the widening crisis and the Fed rate cuts. No wonder most utility stocks and ETFs are hitting fresh highs. 

Reaves Utilities ETF UTES has emerged as the biggest winner, climbing 47.3% this year. It was followed by gains of 31% each for Utilities Select Sector SPDR XLU, Vanguard Utilities ETF VPU, Fidelity MSCI Utilities Index ETF FUTY and iShares U.S. Utilities ETF IDU. These ETFs, hitting a series of new one-year highs in the recent trading sessions, carry a Zacks ETF Rank #3 (Hold) each (see: all the Utilities ETFs here).

Here, we discuss some strong reasons for the outperformance of the sector and ETFs. These factors are likely to fuel the rally in the coming weeks as well:

Defensive Investment

Being a low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or safe haven amid economic or political turmoil.

Iran launched about 200 ballistic missiles targeting Israel on Oct. 1, leading to growing fears of retaliation from Israel. The attack has accelerated tensions in the Middle East region. If the conflict accelerates further, it will disrupt global energy shipments and, thus, economic growth.

Dovish Fed

Being interest rate-sensitive, utility stocks got a boost from the rate cuts. After holding the rates at a 23-year high for 14 consecutive months since July 2023, Federal Reserve Chair Jerome Powell kicked off the new rate cycle era by initiating a 50-basis point cut in interest rates. This marked the first rate cut since 2020. 

The central bank projects two more rate cuts of 50 bps in its final two meetings this year, due in November and December. It also indicates another 100-bps rate cut next year and a 50-bps cut in 2026, which means four rate cuts in 2025 and two in 2026. 

As utilities require huge infrastructure, which creates a massive debt burden and interest obligation, the Fed’s loosening policy is a tailwind for the sector.

AI Boom

AI is bolstering the demand for electricity, as data centers require tons of energy for computing and cooling power. A simple ChatGPT task uses 10 times the energy a normal Google search does. So, data centers with a capacity of 30 megawatts are boosting capacity to handle 300 megawatts of power. This has made the traditional defensive sector of the market most appealing. The Energy Information Administration says data centers are “one of the most energy-intensive building types, consuming 10 to 50 times the energy per floor space of a typical commercial office building” (read: Forget Technology, Focus on Utility ETFs to Tap AI Boom).

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