In a move to support a labor market showing signs of cooling, the U.S. Federal Reserve decided on Dec. 10, 2025, to lower the nation’s interest rate benchmark by 25 basis points, marking the third reduction this year. Following similar cuts in September and October, the federal funds rate now sits in a lower target range of 3.50-3.75%.
This move, which brought U.S. borrowing costs to their lowest level since 2022, has created a highly favorable environment for capital-intensive sectors such as utilities, which require substantial funding to support large-scale infrastructure and operations.
Amid this backdrop, Utility Exchange-Traded Funds (ETFs) emerge as a strategic vehicle for investors seeking diversified and efficient exposure to this defensive sector.
The Link Between Rate Cuts and the Utility Industry
The relationship between interest rates and the utility sector is inversely correlated. Utility companies require massive capital expenditures to maintain grids, upgrade infrastructure, and transition to renewable energy. When the Fed cuts rates, the cost of servicing the heavy debt loads required for these projects drops, directly boosting profit margins and cash flows of utility providers.
Furthermore, utilities are a classic "bond proxy." When interest rates fall, the yields on bonds and savings accounts become less attractive, leading income-focused investors to rotate into high-dividend sectors, such as utilities, in search of better returns. This is because utility stocks are traditionally known for their stable, dividend-paying nature.
This historical pattern suggests that as the Fed's latest cuts work their way through the economy, utility companies stand to gain significantly.
In a world of elevated macro uncertainty, this combination of lower financing costs, defensive cash flows, rapidly increasing electricity demand from AI data centers, and the electrification of all major industries across the board has further strengthened the investment case for utilities.
The Case for Utility ETFs Over Single Stocks
While the sector outlook is positive, investing in individual utility companies entails specific risks, including regulatory changes in a single region, project-specific delays, or company-specific financial issues. A diversified Utility ETF mitigates these idiosyncratic risks by offering exposure to a broad basket of companies across the electric, gas, water, and renewable energy segments.
This provides investors with a one-stop solution to benefit from the sector's tailwinds, eliminating the need to analyze and select individual stocks. ETFs also offer superior liquidity and typically have lower expense ratios than actively managed mutual funds, making them a cost-effective and prudent choice for building a resilient portfolio component.
Top-Ranked Utility ETFs to Buy
For investors looking to capitalize on the current monetary policy shift, several highly-rated Utility ETFs offer compelling options. The following funds carry a Zacks ETF Rank #2 (Buy) each, signaling strong potential for outperformance, and remain well-positioned to benefit from the lower rate environment.
Fidelity MSCI Utilities Index ETF FUTY
This fund, with net assets worth $2.25 billion, offers exposure to 67 utility stocks. Its top three holdings include prominent utility providers, NextEra Energy NEE (11.41%), Constellation Energy CEG (7.31%) and Southern Company SO (6.44%).
FUTY has gained 17.1% year to date. The fund charges 8 basis points (bps) as fees. It traded at a volume of 0.30 million shares in the last trading session.
State Street Utilities Select Sector SPDR ETF XLU
This fund, with assets under management (AUM) worth $22.16 billion, offers exposure to 31 companies from the electric utilities; water utilities; multi-utilities, independent power and renewable electricity producers; and gas utility industries. Its top three holdings include renowned utility providers, NEE (12.80%), CEG (8.37%) and SO (7.07%).
XLU has risen 16.6% year to date. The fund charges 8 bps as fees. It traded at a good volume of 19.17 million shares in the last trading session.
iShares U.S. Utilities ETF IDU
This fund, with net assets worth $1.78 billion, provides exposure to 44 U.S. companies that supply electricity, gas and water. Its top three holdings include renowned utility providers, NEE (11.05%), CEG (7.23%) and SO (6.10%).
IDU has gained 15.7% year to date. The fund charges 38 bps as fees. It traded at a volume of 0.09 million shares in the last trading session.
Vanguard Utilities ETF VPU
This fund, with net assets worth $8.3 billion, provides exposure to 68 U.S. companies within the utilities sector. Its top three holdings include renowned utility providers, NEE (11.45%), CEG (7.34%) and Duke Energy DUK (6.21%).
VPU has soared 17.1% year to date. The fund charges 9 bps as fees. It traded at a volume of 0.21 million shares in the last trading session.
Invesco Dorsey Wright Utilities Momentum ETF PUI
This fund, with market value worth $51.5 million, provides exposure to 35 U.S. exchange-listed companies within the Utilities sector that exhibit powerful relative strength characteristics. Its top three holdings include prominent utility providers, Atmos Energy ATO (3.91%), American Water Works AWK (3.89%) and NRG Energy NRG (3.82%).
PUI has gained 16.8% year to date. The fund charges 81 bps as fees. It traded at a volume of 0.003 million shares in the last trading session.
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Get it now >>NextEra Energy, Inc. (NEE) : Free Stock Analysis Report
Southern Company (The) (SO) : Free Stock Analysis Report
NRG Energy, Inc. (NRG) : Free Stock Analysis Report
Constellation Energy Corporation (CEG) : Free Stock Analysis Report
Duke Energy Corporation (DUK) : Free Stock Analysis Report
Atmos Energy Corporation (ATO) : Free Stock Analysis Report
American Water Works Company, Inc. (AWK) : Free Stock Analysis Report
Invesco Dorsey Wright Utilities Momentum ETF (PUI): ETF Research Reports
State Street Utilities Select Sector SPDR ETF (XLU): ETF Research Reports
Vanguard Utilities ETF (VPU): ETF Research Reports
Fidelity MSCI Utilities Index ETF (FUTY): ETF Research Reports
iShares U.S. Utilities ETF (IDU): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
