Target This AI-Adjacent Sector Right Now

XLU snagged the top spot on White’s list

Subscribers to Chart of the Week received this commentary on Sunday, October 6.

We’re only four trading days into the fourth quarter of 2024, but the lackluster October gains so far have been a stark contrast to the strong September that bucked seasonality. Despite the underperformance from major indexes, several sectors are still pretending it’s September. Utility stocks have been making a lot of noise lately. The often-safer, more defensive sector has become suddenly integral to powering the rapidly growing artificial intelligence (AI) industry. With macro tailwinds in place for the future, there’s also seasonality on the sector’s side, if past is precedent.

To get a closer look, Schaeffer’s Senior Quantitative Analyst Rocky White pulled data from the past 10 years on how exchange traded funds (ETFs) tend to perform during the month of October. Occupying the top spot on the list of 25 ETFs is Utilities Select Sector SPDR Fund (XLU). XLU has enjoyed an average 2.8% October return and has finished the month positive nine times in the past 10 years.

At the time of this writing, Utilities Select Sector ETF is fresh off a 5.9% jump in September and is on track for a ninth weekly win in 11. The ETFs upward trajectory has been impressive, with only two brief pullbacks captured by the 80-day moving average since the stock began its ascent from its February bottom. Over the past 12 months, XLU has added 43%, while its top holdings NextEra Energy (NEE), Southern (SO), and Cincinnati-based Duke Energy (DUK) all up a combine 142.3% year-over-year.

Options sentiment is heavily bearish, leaving ample room for bulls to move in should this sentiment begin to unwind. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OM X PHLX (PHLX), XLU’s 10-day put/call volume ratio of 3.26 ranks in the 86th percentile of its annual range. Echoing this, the security’s Schaeffer’s put/call open interest ratio (SOIR) of 4.48 stands in the highest possible percentile of reading from the past 12 months.

XLU premium is affordably priced, per the stock’s Schaeffer’s Volatility Index (SVI) of 17%, which stands in the 28th annual percentile. Furthermore, the security’s Schaeffer’s Volatility Scorecard (SVS) sits at an 85 out of 100, meaning XLU has tended to surpass these volatility expectations during the past year.

As AI popularity continues to grow and anchor itself to the U.S. power grid, the utilities sector is smack in the middle of the next big thing. If you’re bullish on AI, but don’t know where to begin, the Utilities Select Sector SPRDR Fund ETF may be worth a second glance.