Utilities Sector Trading Strategy — Backtest and Practical Example

The Utilities sector is known to outperform the S&P 500 index when there are market downturns, especially during periods of recession. Let’s take a look at the sector and discuss an example of an utilities trading strategy.

Utilities trading strategies

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What is the S&P Utilities sector?

The S&P 500 Utilities sector consists of those companies included in the S&P 500 that are classified as members of the GICS Utilities sector. They include companies that provide electricity, natural gas, water, sewage, and other services to homes and businesses. In fact, this sector encompasses just about every different type of utility company you can think of — those specializing in making electrical power available to offices and residential homes, as well as those specializing in natural gas transmission and distribution or delivering water to customers. It also includes independent producers of power and renewable electricity, even though they don’t exactly resemble the traditional regulated utility in an era of deregulation. Some utility companies engage in multiple aspects of the sector. The ETFs that track this sector are Utilities Select Sector SPDR Fund (XLU) and Vanguard Utilities ETF (VPU).

What are the 5 biggest stocks in the sector?

The top companies in the sector include:

  1. NextEra Energy, Inc. (NEE): The company and its subsidiaries generate, transmit, distribute, and sell electric power to retail and wholesale customers in North America. It generates electricity through wind, solar, nuclear, coal, and natural gas facilities. The company also develops, constructs, and operates long-term contracted assets that consist of clean energy solutions, such as renewable generation facilities, battery storage projects, and electric transmission facilities. Its market cap as of July 20, 2022, is $155.058 billion.
  2. Duke Energy Corporation (DUK): This company, together with its subsidiaries, produces and distributes energy in the United States. The company operates via three segments — Electric Utilities and Infrastructure, Gas Utilities and Infrastructure, and Commercial Renewables — and serves over 1.6 million customers across many states. As of July 2022, its market cap is $81.255 billion.
  3. The Southern Company (SO): The company engages in the generation, transmission, and distribution of electricity. It also develops and manages power generation assets, including renewable energy projects and sells electricity in the wholesale market; distributes natural gas in Illinois, Georgia, Virginia, and Tennessee; and provides gas marketing services, wholesale gas services, and gas pipeline investments operations. The company has a market cap of $76.236 billion as of July 20, 2022.
  4. Dominion Energy, Inc. (D): Formerly known as Dominion Resources, Inc. the company produces, stores, distributes, and sells energy, including electricity and natural gas. It sells electricity at wholesale prices to rural electric cooperatives and municipalities, as well as into wholesale electricity markets. The company serves approximately 7 million customers. As of December 31, 2021, the company’s portfolio of assets included approximately 30.2 gigawatts of electric generating capacity; 10,700 miles of electric transmission lines; 78,000 miles of electric distribution lines; and 95,700 miles of gas distribution mains and related service facilities. Its market cap as of July 2022 is $63.101 billion.
  5. American Electric Power Company, Inc. (AEP): An electric public utility holding company, it generates, transmits, and distributes electricity for sale to retail and wholesale customers in the United States. It supplies electric power wholesale to other electric utility companies, rural electric cooperatives, municipalities, and other market participants. As of July 2022, the stock’s market cap is $48.186 billion.

Utilities trading strategy

The utility sector is mostly a completely overlooked sector among traders. Investors might be interested due to the “fat” and stable dividends, but traders are mostly totally disinterested in XLU (utility ETF) and utility stocks. Why is that? It mostly boils down to one issue: lack of movement and being unsexy. Utilities rarely hit the headlines and their price movement is sometimes like watching paint dry. Nevertheless, they are an underrated trading vehicle. Boring is sometimes good in trading. Because they are slow-moving, they might be useful for traders. Furthermore, they often go the opposite direction than Nasdaq stocks, for example. This is exactly what you are looking for when you are making trading strategies: you want something that is uncorrelated, something we have covered in separate articles:

On other advantage with the utilities sector is that they are easier to find short strategies in:

Diversifying into short strategies adds a new dimension to your portfolio of strategies if you are successful in finding short strategies.

Example of utilities trading strategy

Below is a backtest and equity curve of a utilities trading strategy we published for our subscribers to our monthly trading edges:

Utilities trading strategy (backtest)
Utilities trading strategy (backtest)

The backtest was done on XLU. The strategy has two variables for entry, and the exit is after N days. Trading strategy metrics:

  • No. of trades: 147
  • Average gain per trade: 0.87% (2.22% for winners and -1.44% for losers)
  • Win ratio: 64%
  • Profit factor: 2.5
  • CAGR: 5.7% (assuming no leverage)
  • Exposure/time in the market: 16%
  • Max. drawdown: -11%

The best part with this strategy is that it’s pretty uncorrelated to the broad market (S&P 500).

Other sector trading strategies

We have covered all the different subsectors in the S&P 500:

Utilities sector trading strategy – ending remarks

We are trading XLU ourselves and consider any utilities trading strategy as a great addition to our portfolio of trading strategies. So should you! Utility stocks might be boring and never hit the headlines, but they are a great trading vehicle.


Why trade XLU and utility stocks?

The Utilities sector includes companies providing services like electricity, natural gas, water, and sewage. It tends to perform well during economic downturns. XLU and utility stocks are discussed for potential trading opportunities, despite being perceived as slow-moving and unsexy.

Why are utility stocks considered overlooked and unattractive to traders?

Utility stocks are often perceived as unexciting due to slow price movements and a lack of attention-grabbing headlines. The Utilities sector’s slow movement and low correlation with other stocks make it a potentially useful and uncorrelated trading vehicle. There are many Investors that might be interested due to the “fat” and stable dividends, but traders are mostly totally disinterested.

Can you provide an example of a utilities trading strategy, and what were the backtest results?

We present a backtest and equity curve of a utilities trading strategy for XLU, with details on trade metrics, win ratio, profit factor, CAGR, exposure, and max drawdown. The strategy is highlighted as pretty uncorrelated with the S&P 500, offering diversification benefits.

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