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Utility stocks returned to focus in 2026 as artificial intelligence data center demand strained the power grid. That backdrop has pushed investors back into sector funds like the Utilities Select Sector SPDR Fund (NYSEARCA:XLU), the Vanguard Utilities ETF (NYSEARCA:VPU), the Invesco S&P 500 Equal Weight Utilities ETF (NYSEARCA:RSPU), and the actively managed Virtus Reaves Utilities ETF (NYSEARCA:UTES).
XLU sits at the center of the conversation. The fund carries a 0.08% net expense ratio, has climbed roughly 8% year to date, and pays a 2.6% dividend yield. The question for investors is whether that combination still offers the stability the sector is known for after a re-rating driven more by AI narratives than by regulated returns.
The Rate and Power Backdrop
The Federal Reserve cut its target rate by 75 basis points between October and December of last year and has held at 3.75% through the first half of 2026. Lower short rates reduce financing costs for capital-intensive utilities and make regulated dividend streams look better relative to cash alternatives.
Longer yields tell a more complicated story. The 10-year Treasury sits at 4.54%, near the top of its 12-month range and above its 4.25% average. That level caps how far utility multiples can reasonably expand from here.
Behind both is power demand. Research cited in PineBridge’s 2026 Equity Outlook points to roughly 25% annual growth in data center equipment for the next four to five years, constrained mainly by transmission and electrical infrastructure. That bottleneck is the utility bull case.
XLU: The Default Utility Vehicle
The Utilities Select Sector SPDR Fund tracks the utilities slice of the S&P 500 and holds 34 stocks with $22.5 billion in assets. The fund is market-cap weighted, which means the AI power theme shows up automatically at the top of the book. The top ten names represent roughly 58% of the portfolio, with NextEra Energy at 13.59% of assets anchoring the book alongside other mega-cap regulated and merchant operators.
Constellation and Vistra are the reasons this fund has behaved differently in 2026. Both operate merchant nuclear and gas generation facilities and have signed multi-year supply arrangements with hyperscalers. That gives XLU direct exposure to data center power pricing rather than only regulated rate base growth.
Shares trade near $45, up about 13% over the past year and 63% over five years. The trailing PE stands at 23x, elevated for a sector historically valued closer to 17x. Some of the growth premium in merchant power names is now showing up across the whole basket.
VPU: The Broader, Cheaper Cousin
Vanguard’s fund tracks a broader MSCI utilities index and holds a larger roster of small- and mid-cap names alongside the same megacaps that dominate XLU. Its expense ratio is 0.09%, essentially even with XLU on cost. Performance has tracked closely: 7.4% year-to-date and 13% over one year.
The distinction lies at the edges of the portfolio. VPU’s longer holdings list captures water utilities and smaller regulated names that XLU underweights or excludes. For an investor who wants sector exposure without leaning as heavily into a handful of merchant power stocks, VPU is the more diversified expression of the same idea. The give-back is slightly less direct beta to the AI power trade.
RSPU: An Equal Weight Alternative
Invesco’s equal-weight product assigns each S&P 500 utility roughly the same portfolio weight and rebalances quarterly. That structural choice matters right now because market cap weighting has pushed nearly a third of XLU into a handful of names. RSPU dilutes that concentration by design.
The mechanism cuts both ways. If the largest merchant-power leaders continue to drive the sector toward AI-driven multiple expansion, RSPU will lag. If the theme broadens to smaller, regulated names catching up on rate-case wins and transmission spending, RSPU captures more of that move than XLU does. Investors who are uncomfortable owning a fund in which one stock accounts for 14% of assets have reason to consider the equal-weight version.
UTES: The Active Pick
Virtus Reaves Utilities is the outlier on this list. It is one of the few actively managed utility ETFs of meaningful size, run by a small team that concentrates in a relatively short list of names and can shift between regulated utilities, independent power producers, and grid-adjacent businesses as opportunities emerge.
The fund carries a higher expense ratio than passive index products, reflecting the standard cost of active management. The case for UTES in 2026 rests on whether the manager’s positioning in merchant power and grid-critical names outperforms the passive default. It is the most concentrated way to play the theme covered here, which cuts both directions when a single top holding stumbles.
Dividend Reality Check
Utility ETFs are bought for income as much as capital appreciation. XLU has paid 111 consecutive quarterly dividends. Its trailing twelve-month payout of $1.48 per share works out to a yield near 2.6%. That figure looks thin relative to the 10-year Treasury noted earlier, which is the main pushback against the sector at current prices. The counterargument is that dividends grow while Treasury coupons are fixed, and XLU’s annual distribution has moved meaningfully higher over the past decade.
Choosing Between Them
The fit depends on what a buyer is actually reaching for. XLU is the cleanest expression of the current utility trade, tilted toward the megacaps benefiting most from AI-driven power demand, and at one of the lowest expense ratios in the category. VPU offers essentially the same core exposure with a wider tail and marginally less concentration in merchant power. RSPU suits investors who think the AI premium on top names is stretched and who want smaller utilities to catch up. UTES is for buyers who want a human to decide which utilities to hold, rather than an index committee. Every fund on this list reflects the sector’s rate sensitivity, and none will be immune if the 10-year Treasury climbs back through its May high.
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