This is likely to be a pivotal year in terms of elevated adoption of renewable energy sources around the world, indicating that traditional utilities can play a more prominent role in the proliferation of more environmentally friendly energy consumption and sources.
That could put exchange traded funds such as the Utilities Select Sector SPDR Fund (XLU) among the sector ETFs to watch this year. XLU, the dominant name among utilities ETFs, did its job in a calamitous 2022. The fund actually gained 1.4% while the S&P 500 lost 18.2%. Predictably, XLU was also significantly less volatile on an annualized basis.
Some of XLU’s 2022 sturdiness is attributable to market participants embracing defensive assets, but this year, utilities stocks could shine as the sector prices in more benefits from the Inflation Reduction Act (IRA) — something some analysts argue hasn’t occurred as of yet.
“However, state action is necessary to fully mobilize IRA investments and reduce consumer energy burdens. By acting now, state policymakers and utility regulators can put more consumers and communities on a path to long-term energy affordability and mitigate the impact of future energy price spikes,” reported Utility Dive.
With Russia’s war against Ukraine approaching the one-year mark, governments around the world are reminded about the importance of energy security — particularly coming off a year in which global oil prices spiked. It’s possible for oil prices to remain elevated this year, further cementing the point that alternatives to fossil fuel must be advanced, particularly in the name of reducing dependence on imports from bad actors.
Another area where XLU components can make significant headway this year is decarbonization, which is among the points of emphasis featured in the aforementioned Inflation Reduction Act.
“The IRA makes a sizable down payment on long-term energy affordability by investing in cheaper clean energy, home efficiency, and weatherization. Energy Innovation Policy & Technology modeling shows IRA grid decarbonization incentives could achieve a 75% to 85% clean grid by 2030. And Resources for the Future analysis shows a cleaner grid will save U.S. households $170 to $220 on their energy bills every year,” according to Utility Dive.
NextEra Energy (NYSE:NEE) and Duke Energy (NYSE:DUK), which combine for nearly 24% of XLU’s roster, are among the old guard utilities that are already making renewable energy inroads while providing needed cost savings to customers.
In fact, customer benefits are an aim of the Inflation Reduction Act, confirming an important social benefit for XLU components, indicating that these companies could see improved ESG credibility over time.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.