The Sector Wall Street Calls ‘Defensive’ Has Quietly Outpaced Both Inflation and the 10-Year Treasury for Almost Two Decades Running

As history has proven, markets go in cycles. There are bullish ascents up and bearish descents down.  When they go up, everyone is buoyant because of the paper gains they are making. When the opposite happens, panic follows, and there is the proverbial “flight to safety” towards precious metals, bonds, or “defensive sector” stocks. The “defensive” category features  industries which provide essential products and services that are in demand 24/7 and have no season. Some examples are energy, water, food, and medicines. 

When “the flight to safety” rears its head, conservative investors may overlook defensive stocks in favor of the locked in income yield that bonds promise – and that may be to their detriment. There is a defensive ETF that has both outperformed the US 10-year Treasury bond as well as stayed ahead of inflation for 13 of the last 20 years, and will likely include 2026 as well, based on current trends:  The State Street Utilities Select Sector SPDR ETF (NYSE: XLU | XLU Price Prediction).

State Street Utilities Select Sector SPDR ETF

Utilities companies generate electricity from hydrocarbons and renewables for the grid.

Launched on December 16, 1998, XLU was designed to track the S&P 500’s Utilities Select Sector Index. Focused on electric, water, and gas utilities, XLU also includes companies involved with renewables as well. It contains 31 different stocks. XLU has a 4-star overall Morningstar rating. Other details include:

XLU’s top 10 holdings are:

• NextEra Energy – 14.32%
• Southern Company – 7.41%
• Duke Energy – 6.89%
• Constellation Energy – 6.16%
• American Electric Power – 5.0%
• Sempra – 4.36%
• Dominion Energy – 3.86%
• Entergy Corp. – 3.67%
• Xcel Energy – 3.40%
• Exelon Corp. – 3.26%

Good Defense Creates Good Offense

NY Knicks legend Walt Frazier has totued that “good defense can spark offense” for over 50 years.

NY Knick legend Walt “Clyde” Frazier is heralded as one the best all-time 2-way players in NBA history. He was both a stifling defender as well as a stealthily omnipresent scoring threat, and helped to lead the Knicks to their only two NBA championships to date, and has often preached on how solid defense creates offensive opportunities. 

In a similar fashion, XLU’s “defensive” categorization belies its history of gains. Over the past two decades, It has outpaced both inflation and the US 10-Year Treasury Bond in 13 out of 20 years, and will likely close out 2026 on top as well. In the table below, the years in italics are the only exceptions to XLU’s outperformance wins when compared head-to-head with average annual inflation and the annual 10-year Treasury Bond yield. 

It’s especially interesting to correlate historical events and policies with the years in which XLU did not hold true to form and was outpaced by the 10-year Bonds::

• 2008 was the year of the subprime mortgage banking meltdown, which led to a stock selloff across the board.
• 2012 marked some of the mildest weather periods in US history, which led to decreased demand. The surge in shale gas supplies as a result of fracking resulted in a -26% drop in natural gas prices. 
• 2015 saw interest rates rise appreciably with inflation, causing investor rotation into higher-yielding bonds. 
• 2020 was the start of the Covid-19 pandemic. XLU closed with a mere 64 basis points of inflation and 38 basis points of Treasury yields.
• 2022 caused fuel costs to surge as a result of the Ukraine War. Fuel prices also soared due to Biden’s halt to the Keystone XL pipeline in favor of less reliable and efficient renewable energy sources. 
• 2023 experienced strangling red tape overregulations from the Biden administration that stifled the supply chain and the ability to expand drilling operations. 

The Future Case For XLU

A.I. data centers are currently the biggest drivers for the huge increase in electricity demand and capacity.

According to the April 2026 Global Energy Review, global energy demand grew 2.3x faster in 2025 than total demand to 850 TWh last year. Declaring that we are entering “The Age of Electricity”, both rapidly escalating supply and demand are transforming utilities from a defensive staple sector into an aggressive growth one. Driving this growth are:

• A.I. Data Centers (responsible for 17% of 2025 global electricity consumption)
• Electric Vehicles
• HVAC Units and Heat Pumps
• Mandates from the Trump administration that new data centers must be energy self-sufficient, i.e. capable of generating their own power without taking from municipal grids. 

For retirees and individual investors, there is an additional consideration. Utilities ETFs that deliver both capital gains and dividend income are taxed as capital gains and qualified dividends. Bond coupon income, on the other hand, is taxed at the higher regular income rate. As the Iran War winds down, oil prices will inevitably fall back to earth. In turn, this should lead to  interest rates also likely to be cut this year, as new Federal Reserve Chairman Kevin Warsh has expressed past inclinations in that direction, as long as inflation returns to 2025 levels.