Utilities gain as yields drop, but low quality grades dominate

The Utilities Select Sector SPDR Fund (XLU), an exchange-traded fund tracking the sector, closed +1.5% on Thursday, October 29. Sector breadth was exceptionally broad, as 96.8% of its stocks advanced. That participation came despite thin quality across the group, with only 25.0% of the fund sitting in companies graded A or B by EasyAlpha against their industry peers. Gains were distributed evenly across company sizes. The cap-weighted sector closed +1.5%, while the equal-weighted sector finished +1.5%. WEC Energy Group Inc led the advance, closing +3.7%. Exelon Corporation followed, finishing +2.5%. On the downside, Vistra Corp. was the lone notable decliner, closing -1.3%. In broader trading, the 10-year Treasury yield fell to 4.94% as bond yields eased, though our sources show no reported driver for the sector's wider advance.

At the company level, WEC Energy Group Inc beat third-quarter earnings expectations and raised its full-year guidance. Across the wider market, 8 of the 11 sectors rose on the day.

The session added to a sharp monthly rebound, leaving the fund at +9.4% over the past month. That recent strength contrasts sharply with longer-term performance. Over the past twelve months, the fund sits at -52.1%.

That gap between short-term gains and twelve-month losses highlights the composition of the sector. EasyAlpha grades each company against its industry peers based on historical analysis. Companies graded A or B demonstrate stronger fundamentals, and historically they have carried a lower risk of large drawdowns than companies graded D or E. Across the sector, only one-quarter of the fund's graded assets sits in those top two tiers. Most of the portfolio lands in average or lower quality tiers, where companies historically carry a higher risk of large drawdowns.