Assessing RSPU's Portfolio Fit in a Shifting Utilities Landscape

2026 is shaping up as a year of reckoning for the electric power industry. The passage of the One Big Beautiful Bill Act (OBBB) has fundamentally recalibrated the sector's policy landscape, axing most subsidies for clean energy and electric vehicles. This policy pivot is forcing a rapid strategic consolidation, with the power and utilities sector already seeing total announced deal value reach $141.9 billion over the past year. The M&A surge is a direct response to shifting incentives, as investors and utilities alike double down on assets that promise stable, dispatchable power to meet surging demand, particularly from data centers.

This creates a powerful demand-supply dynamic. On one side, there is unprecedented pressure from large loads, mainly data centers for AI, seeking to connect to the grid. This has ballooned interconnection queues and driven up electricity demand forecasts. On the other, there are early signs that the most aggressive predictions may not materialize. Some utilities that introduced stricter interconnection rules have already seen their large load queues shrink by 50% or more. The U.S. Energy Information Administration has revised down its generation growth forecast for 2026, and the PJM Interconnection is expected to release a new load forecast that could be significantly lower. This tension between speculative demand and tangible build-out is the core uncertainty for the year.

For a portfolio manager, this sets up a complex risk-adjusted return environment. The sector is bifurcating: on one hand, a wave of consolidation is creating scale and reliability, potentially offering a defensive, income-oriented play. On the other, the data center frenzy carries the risk of a classic tech bubble, where overbuilding leads to underutilized assets and stranded costs. The strategic fit for any utility holding, including RSPU, hinges on navigating this dichotomy. The key will be assessing which companies are positioned to capture the real, near-term load growth without being caught on the wrong side of a potential oversupply correction.

RSPU's Construction and Cost Efficiency

From a portfolio construction standpoint, RSPU is a broad-based utility exposure tool with a clear structural profile. It is an equal-weighted ETF that tracks the S&P 500 Utilities Plus Index, which includes all companies in the S&P 500 classified as utilities under GICS. This mandates inclusion of every major utility, from the largest integrated players to smaller regional operators, providing a comprehensive, sector-wide snapshot.

The fund's design, however, comes with a cost. Its gross expense ratio of 0.40% is notably higher than the cheapest utility ETF, FUTY at 0.08%. For a passive utility holding, this premium is a material drag on risk-adjusted returns, especially in a low-yield environment. It positions RSPU as a niche product rather than a cost-efficient core holding.

This niche status is underscored by its asset base. With $315.6 million in assets under management, RSPU is dwarfed by the largest utility ETF, XLU, which commands $14.7 billion. This scale gap has direct implications for liquidity and trading efficiency. The fund's average daily volume is a fraction of XLU's, making it a less liquid instrument for large institutional trades and increasing the potential for wider bid-ask spreads. For a portfolio manager, this means RSPU is better suited for tactical, smaller allocations rather than a primary utility exposure.

The equal-weighting scheme itself is a double-edged sword. While it provides a more balanced tilt away from the extreme concentration seen in market-cap-weighted indices, it also introduces higher volatility. Smaller utilities, which are more sensitive to local regulatory and economic cycles, have a greater impact on the fund's daily performance. This structural characteristic must be weighed against the fund's higher fee and lower liquidity when considering its fit within a diversified portfolio.

Portfolio Implications: Defensive Core vs. Active Risk

The traditional utility sector's role as a defensive portfolio anchor is under significant strain. Historically, utilities provided a reliable source of income and a hedge against equity market drawdowns, with their low correlation to growth stocks during recessions. This defensive setup is now complicated by the AI-driven rally, which has blurred the lines between defensive and cyclical assets. As noted, the sector has kept close pace with a rallying broad market for the last two years, even outperforming the Nasdaq in recent months. This shift challenges the core premise of using utilities for portfolio stability.

For RSPU, this creates a fundamental tension. The fund's equal-weighting scheme, while providing broad sector coverage, amplifies this volatility. By giving smaller, more speculative utilities a larger bite of the portfolio, it increases exposure to sector-specific shocks and regulatory risks. This structural characteristic works against the fund's potential as a low-volatility core holding. The higher expense ratio of 0.40% further erodes the risk-adjusted return, making it a less efficient tool for capturing the defensive dividend yield that its peers offer.

From a portfolio construction perspective, RSPU's fit is best described as a tactical, high-cost bet on the AI-utility nexus rather than a core defensive allocation. Its equal-weight design means it will participate more fully in any sector-wide rally, but it will also suffer more in a correction. The fund's liquidity constraints and scale make it ill-suited for large, strategic allocations. Instead, it functions as a niche instrument for investors seeking concentrated exposure to the utilities benefiting from data center build-out, accepting the higher fees and volatility as a price for that specific tilt.

The bottom line is that RSPU does not fit neatly into a traditional portfolio strategy. It lacks the low-cost, high-liquidity efficiency of a core holding like XLU, and it has lost the pure defensive characteristics of its namesake sector. For a portfolio manager, the decision is binary: either accept the fund's active risk and higher cost for its specific equal-weighted, AI-tilted exposure, or look elsewhere for a defensive utility play. In the current environment, the fund's design makes it a more active, tactical risk than a passive, defensive core.

Catalysts and Risks: What to Watch

For a portfolio manager, the forward view for RSPU hinges on a handful of high-impact, near-term catalysts. The fund's equal-weight, broad-sector design means it will be buffeted by these events, but its structure may not allow it to capture the full benefit of sector winners. The key is to monitor the pace and nature of consolidation, the actual build-out of new power, and any regulatory divergence.

First, watch the M&A pipeline. The sector's total announced deal value reached $141.9 billion over the past year, a surge driven by strategic consolidation. While this trend favors larger, integrated players with the scale and balance sheets to execute, RSPU's equal-weighting dilutes that advantage. The fund gives the same weight to a small regional utility as to a mega-merger target. Therefore, the catalyst here is not just deal volume, but the type of deals. A wave of mega-mergers could signal a sector-wide strength, but the fund's structure means its alpha generation from these events will be muted. The real risk is if consolidation slows, which could signal a loss of confidence in the long-term demand thesis.

Second, track the execution gap between queued projects and actual generation build-out. The data center frenzy has ballooned interconnection queues, but early signs of a correction are emerging. Some utilities that introduced stricter interconnection rules have already seen their large load queues shrink by 50% or more. This is a critical early warning sign. For RSPU, this divergence between speculative demand and tangible build-out is a direct risk to earnings. If the promised power demand fails to materialize, it pressures the revenue growth of all utilities in the fund, regardless of their individual merits. The fund's liquidity and scale make it a less efficient vehicle to navigate this uncertainty.

Finally, monitor for any regulatory or financial divergence between traditional utilities and newer, flexible power providers. The One Big Beautiful Bill Act has shifted policy, and the market is pricing in a sector that values dispatchable, reliable generation. This could create a bifurcation where traditional regulated utilities see more stable, predictable cash flows, while newer, merchant-focused players face higher volatility. RSPU's equal-weighting could inadvertently overweight these more volatile, flexible assets if they are not yet large enough to be market-cap weighted. The fund's higher expense ratio of 0.40% also means it needs a clear, sustained earnings catalyst to justify its cost, making it more sensitive to any perceived divergence in dividend sustainability or regulatory treatment.

The bottom line is that RSPU is a passive vehicle caught in a dynamic sector. Its portfolio construction limits its ability to capture alpha from consolidation or defensive positioning. For a manager, the watchlist is clear: monitor deal flow for sector health, track interconnection queue data for demand reality, and watch for regulatory shifts that could alter the risk profile of the fund's diverse holdings.