When The Market Dropped, XLU ETF Held Its Ground

True diversification goes beyond owning different stocks to provide a cushion when the market gets rough.

In a recent market selloff, as the S&P 500 fell 8.9%, one corner of the market actually gained ground, returning +6.5%. That kind of resilience is what investors hope for from diversification, but rarely get. The fund that delivered it is the State Street Utilities Select Sector SPDR ETF (XLU), an exchange-traded fund that owns shares in America’s utility companies.

This is an equity fund, meaning it is fully invested in the stock market. It seeks to track the performance of an index of companies in the utilities sector, holding stocks like NextEra Energy and Duke Energy. Its job is not to avoid market swings, but to weather them differently.

How Did It Behave When Stocks Fell?

The fund’s record shows a consistent pattern of holding up. Across the last 5 S&P 500 drawdowns, XLU held up in 5 of them. The contrast is clearest in the deepest recent drop: in a 2025 selloff, the S&P 500 fell 18.8%, while XLU returned -8.3%. While still a loss, it cushioned the blow by more than half. In other downturns, it did even better. When the S&P 500 fell 5.4% in a 2024 selloff, this fund returned +0.4%, staying positive.

What Kind Of Shield Is This?

This is a stay-invested form of defense. It does not move your money into a different asset class like bonds or cash. Instead, it keeps you in stocks, but in a sector known for its steadier demand. People keep the lights on and heat their homes regardless of the economic climate, which gives utility companies more predictable revenues. This tends to make their stocks less volatile during broad market panics. It is a way to reduce risk without exiting the market entirely.

Does It Defend Every Single Time?

No defender is perfect. The fund’s resilience has limits, and past performance is never a guarantee of future results. In that sharp 2025 selloff, the fund still lost ground with a return of -8.3%. It softened the market’s fall, but it did not erase it. A defensive holding can still have down periods, and it is crucial to remember that it is designed to fall less, not to be immune from falling.

So Where Does This Fit In A Portfolio?

The real question this fund raises is one of allocation. As you look at your own portfolio, is there anything in it that has a history of holding its ground when everything else is falling? The goal is not to predict the market’s next move, but to build a portfolio that can handle a range of outcomes. Of course, the price you pay for any fund is a separate consideration for investors. For many, having a holding that provides a cushion during tough times is a core part of a long-term plan.

Is There A Stronger Defender Than This?

Knowing XLU held up is a start, but it raises the sharper question: is it the best at this, or does another fund cushion a selloff even more for less of a trade-off? That is worth checking before you lean on any single defender.

Our Drawdown Defenders screen answers it directly. It ranks the funds that held up across the recent S&P 500 selloffs by how far they beat the S&P during those drops, how many of the selloffs each one defended, and what they have actually returned since, with annualized return, volatility, Sharpe and Sortino all measured over the same stretch. It leans toward the defenders that kept their upside too, not just the funds that sat out the drop, so you can see where XLU sits and which funds protected without giving up as much. For the wider picture on valuation and long-run performance, the ETF Valuation and Performance Scorecard ranks the major funds side by side.

What Are You Giving Up For Safety?

There is a catch worth saying plainly. A fund that barely moves when stocks fall usually barely moves when they rally, either. Lean too hard on defenders, and you trade away the upside that actually grows a portfolio over time, swapping one regret for another. The aim is not maximum defense, it is the right balance between protecting the downside and still owning the recovery.

That balance is the idea behind our High Quality (HQ) Portfolio: a rules-based, multi-factor mix built to participate in the upside while screening for the quality and resilience that softens the falls, re-balanced on a schedule so no single shock, and no single defensive bet, decides the outcome. It has a record of outpacing a benchmark that combines the three major indices – the S&P 500, S&P Mid-cap, and Russell 2000.