Boring Beats Brilliant: How a Utilities ETF Has Quietly Trounced the S&P 500 in Every Recession This Century

Utility stocks have been in the market limelight recently, and a big reason comes down to rising electricity demand from the artificial intelligence (AI) build-out. Data centers consume an enormous amount of power, and as hyperscalers race to expand infrastructure, investors have started piling into utility companies expected to benefit from rising electricity demand, transmission upgrades, and long-term infrastructure spending.

Honestly, though, it is a bit of a bittersweet moment for defensive investors who once prized utilities as a classic “widows and orphans” holding. That phrase historically referred to investments considered stable enough to preserve capital and generate dependable income for vulnerable investors like retirees, widows, or families without the ability to withstand large portfolio drawdowns.

Utilities earned that reputation because electricity and gas demand tends to remain relatively stable regardless of economic conditions, while regulated pricing structures often created predictable cash flows and reliable dividends. But today, the sector looks different. Between rising natural disaster risks, grid modernization costs, decarbonization mandates, and the massive capital expenditure commitments tied to AI infrastructure, utilities may no longer be the sleepy defensive businesses many investors remember.

So in light of that, I decided to take a walk through history to see how utilities have actually held up against the broader market during periods of economic stress.  Specifically, using testfolio.io, I compared the State Street Utilities Select Sector SPDR Fund (NYSEARCA: XLU) against the State Street S&P 500 ETF Trust (NYSEARCA: SPY) to see how utilities stocks performed during major recessions and bear markets over this century.

What Is XLU?

Before getting into the comparison, it helps to briefly explain what XLU actually is for those unfamiliar with it. This ETF tracks the Utilities Select Sector Index, a benchmark composed of 31 utility stocks drawn directly from the S&P 500. That is important because the companies have already been screened for size, liquidity, and earnings consistency before ever entering XLU.

From there, the ETF weights holdings by market capitalization, which creates an even larger tilt toward mega-cap utility companies. Roughly 65% of the portfolio currently sits in electric utilities, with another quarter allocated toward multi-utilities. Smaller allocations are spread across renewable electricity producers, independent power operators, and gas utilities.

Historically, XLU has also served as a decent income vehicle. As of May 19th, the ETF paid a 2.7% 30-day SEC yield alongside quarterly distributions. One metric I particularly like looking at with defensive sectors is beta, which measures sensitivity to the broader market. According to Yahoo Finance, XLU currently has a five-year beta of just 0.58.

How XLU Held Up Against the S&P 500 During Recessions

I backtested XLU against SPY over a 27.41-year period running from December 22nd, 1998 through May 19th, 2026. Right off the bat, one thing becomes apparent: utilities did not outperform the broader market over the full period. XLU compounded at 7.74% annualized, while SPY returned 8.68%.

That is generally what you would expect when overweighting a lower-beta defensive sector rather than higher-growth areas like technology, communications, or consumer discretionary. But the interesting part shows up during bad recessions and major drawdowns.

During the 2008 financial crisis, SPY ended 2008 down 36.81%, while XLU declined a smaller 28.92%. Again, this is still a substantial loss, and investors should remember this remains a 100% equity ETF with no downside hedging or bonds layered on top. But compared to the broader market, utilities clearly absorbed some of the damage.

Then came 2022. While SPY fell 18.17% during the inflation-driven bear market, XLU actually finished the year positive, up 1.42% on a total return basis. That result was especially notable because many traditional retirement diversifiers like bonds also struggled badly that year as rising interest rates hurt fixed income valuations.

So, historically utilities have consistently demonstrated defensive characteristics during recessions and market stress periods. But I do want to stress one important caveat: the utility sector today is not exactly the same utility sector investors owned twenty or thirty years ago.

The industry now faces far larger capital expenditure demands, political and regulatory risks, climate-related infrastructure challenges, and increasingly direct exposure to AI-driven power demand cycles. So while XLU historically behaved like a defensive ballast inside equity portfolios, investors should be careful about assuming those same characteristics will remain unchanged going forward.