The Top ETF of the First Nine Months and Its Best Stocks

Reaves Utilities ETF UTES, which targets the broad U.S. utility sector, has surged 45.4% this year, becoming the top-performing ETF of the first nine months.

Although most of the stocks in UTES’s portfolio have delivered strong returns this year, a few have gained more than 25%. These are Vistra Energy Corp. VST, Constellation Energy Corporation CEG, Public Service Enterprise Group Inc. PEG, NextEra Energy Inc. NEE and NiSource Inc NI.

The utility sector has gained immense investor attraction as a new emerging AI play, especially after the technology lost momentum on overvaluation concerns. This is especially true as 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” (read: Forget Technology, Focus on Utility ETFs to Tap AI Boom).

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 17.53 versus 19.79 for the broad market fund IVV.

Further, high-dividend-yield sectors such as utilities are the biggest beneficiaries of a rate cut, given their sensitivity to interest rates. These offer higher returns due to their outsized yields.

Stock market volatility and uncertainty triggered by slowdown concerns, geopolitical tension and the looming presidential election also add to their strength. 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.

Let’s take a closer look at the fundamentals of UTES.

UTES in Focus

Reaves Utilities ETF is the only actively managed ETF that seeks to provide returns through a combination of capital appreciation and income, primarily through investments in utility stocks. It holds 17 stocks with a heavy concentration on the top three firms.

UTES has AUM of $186.3 million and trades in an average daily volume of 33,000 shares. It charges 49 bps in annual fees (read: 5 ETFs Up More Than 35% in the First Nine Months).

Best-Performing Stocks of UTES

Vistra Energy is an energy company that offers electricity and power generation, distribution and transmission solutions. The stock accounts for an 11.8% share in the ETF and has soared 209% so far this year.

Vistra Energy saw a solid earnings estimate revision of 18 cents over the past seven days for this year and has an estimated growth of 30.9%. It has a Zacks Rank #3 (Hold).

Constellation Energy generates and markets electricity. It sells natural gas, renewable energy and other energy-related products and services. The stock jumped about 110% in the first nine months and accounts for a 12.7% share in the UTES portfolio.

Constellation Energy has an estimated earnings growth rate of 58.68% for this year and a Zacks Rank #3.

Public Service Enterprise is a diversified energy company, which consists primarily of a regulated electric and gas utility and a nuclear generation business. The stock jumped about 44% in the first nine months of 2024. Its earnings are expected to grow 5.46% this year.

PEG makes up 4.6% of the assets in UTES and currently has a Zacks Rank #3.

NextEra Energy is a public utility holding company engaged in the generation, transmission, distribution, and sale of electric energy. The stock makes up 16.3% of the assets in the UTES portfolio. It saw a positive earnings estimate revision of a penny over the past 30 days for this year and has an expected earnings growth rate of 7.26%.

NextEra Energy surged 39.3% this year and has a Zacks Rank #3 (read: 5 Sector ETFs Scaling New Highs on Fed Rate Cuts).

NiSource, together with its subsidiaries, provides natural gas, electricity and other products and services in the United States. The stock has risen 28.7% this year.

NI’s earnings are expected to grow 7.5% this year. The stock accounts for a 3.6% share in UTES and has a Zacks Rank #2 (Buy).

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