Forget Technology, Focus on Utility ETFs to Tap AI Boom

The technology sector, the biggest winner this year, has been suffering in recent weeks despite the potential artificial intelligence (AI) growth opportunities. While tech has become overvalued, utility is now the big untapped AI play and is undervalued (read: Should You Buy the Dip in Tech ETFs?). 

Investors seeking to make the most of the next phase in the AI industrial revolution could consider utility ETFs. These include Utilities Select Sector SPDR XLU, Vanguard Utilities ETF VPU, iShares U.S. Utilities ETF IDU, Fidelity MSCI Utilities Index ETF FUTY and Invesco S&P 500 Equal Weight Utilities ETF RSPU. These funds have a Zacks ETF Rank #3 (Hold).

Reasons to Bet On Utility Sector

 
AI is bolstering the demand for electricity, as data centers require tons of energy for computing and cooling power. Morningstar Chief US Market Strategist David Sekera finds utilities to be "the big story this year" as the sector becomes more like a "second derivative of AI.” 
    
A simple ChatGPT task uses 10 times the energy a normal Google search does. So, data centers with a capacity of 30 megawatts are boosting capacity to handle 300 megawatts of power. This has made the traditional defensive sector of the market most appealing. The Energy Information Administration says data centers are “one of the most energy-intensive building types, consuming 10 to 50 times the energy per floor space of a typical commercial office building.”

The International Energy Agency (IEA) forecasts that data centers’ total electricity consumption could reach more than 1,000 terawatt-hours (TWh) in 2026, or “roughly equivalent to the electricity consumption of Japan.” In the United States alone, Boston Consulting Group estimates AI-powered data centers to consume as much as 7.5% of the electric output by 2030, three times of what it was in 2022. An analyst at Wells Fargo recently reported that U.S. electricity demand is expected to grow by as much as 20% by 2030, and AI data centers alone are likely to add 323 TWh of electricity demand (one TWh powers 70,000 homes for a year).

The increased adoption of electric vehicles will also boost electricity demand for companies within the utilities sector. Further, the utility sector is attractively valued with a P/E ratio of 17.10 versus 19.56 for the broad market fund (IVV).

Added to the strength is the stock market volatility and uncertainty triggered by slowdown concerns, geopolitical tension and the looming presidential election. Being a low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or safe haven amid economic or political turmoil (read: Defensive ETFs Shine Amid a Rough Start to September).

Utility ETFs to Tap

Utilities Select Sector SPDR (XLU) 

With an AUM of $17 billion, Utilities Select Sector SPDR seeks to provide exposure to companies from the electric utility, water utility, multi-utility, independent power and renewable electricity producers and gas utility industries. XLU follows the Utilities Select Sector Index, holding 31 stocks in its basket. Electric utilities take the top spot among sectors at 66.1%, closely followed by multi utilities (26.6%).

Utilities Select Sector SPDR charges 9 bps of annual fees and sees a heavy volume of 9 million shares, on average (see: all the Utilities ETFs here).

Vanguard Utilities ETF (VPU)

Vanguard Utilities ETF follows the MSCI US Investable Market Utilities 25/50 Index, holding 66 securities in its basket, with none accounting for more than 13% share. More than half of the portfolio is allocated to electric utilities, closely followed by multi utilities (25%). 

Vanguard Utilities ETF charges 10 bps in annual fees and sees a good volume of around 177,000 shares on average. It has AUM of $6.3 billion.

iShares U.S. Utilities ETF (IDU)

iShares U.S. Utilities ETF tracks the Russell 1000 Utilities RIC 22.5/45 Capped Index. It holds a basket of 44 securities with a slight tilt toward the top firm at 12.3%, while others make up for less than 7.2%. Here again, electric utilities dominate the portfolio at 57.8%, followed by multi utilities (22.7%). 

iShares U.S. Utilities ETF has amassed $1.4 billion in its asset base while trading in a good volume of 150,000 shares a day on average. The fund charges 39 bps in annual fees.

Fidelity MSCI Utilities Index ETF (FUTY)

Fidelity MSCI Utilities Index ETF provides exposure to 68 utility stocks with AUM of $1.3 billion. This is done by tracking the MSCI USA IMI Utilities Index. Here too, electric utilities and multi utilities are the top two sectors with 62.4% and 24.8% share, respectively. 

Fidelity MSCI Utilities Index ETF has an expense ratio of 0.08%, while the average daily volume is good at 196,000 shares a day. 

Invesco S&P 500 Equal Weight Utilities ETF (RSPU) 

Invesco S&P 500 Equal Weight Utilities ETF offers exposure to 33 equal-weighted companies in the utilities and telecommunication services sectors of the S&P 500 Index and tracks the S&P 500 Equal Weight Utilities Plus Index. Electric utilities and multi-utilities account for 55.4% and 32.8% of the assets, respectively, while independent power and renewable electricity round off the next spot with 5.1% exposure. 

Invesco S&P 500 Equal Weight Utilities ETF charges 40 bps in annual fees. It has AUM of $314.4 million.

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