XLU holds the utilities sector of the S&P 500: regulated electric and gas utilities, multi-utilities, independent power producers and water utilities. Earnings are relatively stable because prices are set under regulatory frameworks, and the sector pays a higher dividend yield than most equity sectors. The fund often behaves like a long-duration bond: it tends to rise when interest rates fall, because dividends become more attractive relative to bond yields, and fall when rates rise, because borrowing costs increase for these capital-intensive companies. Utilities are investing heavily in renewable generation, grid upgrades and capacity for growing electricity demand, which can increase their regulated asset base and earnings. XLU has historically been among the more defensive equity sectors during market declines.
