Artificial intelligence (AI) will likely be the defining technology of the next decade. In fact, Microsoft co-founder and philanthropist Bill Gates believes it will be as transformational as "the creation of the microprocessor, the personal computer, the internet, and the mobile phone."
Investors hoping to benefit from the AI boom are focused on technology companies. That is especially true of Palantir and Nvidia, the second- and third-best performing stocks in the S&P 500 this year, respectively. But Vistra is currently the best performing member of the index, and it hails from the overlooked utilities sector.
U.S. demand for electricity is projected to increase at 2.4% annually through 2030, and AI data centers will be the driving force. Indeed, data centers will consume 8% of U.S. power by the end of the decade, which is more than double what they consumed in 2022. Industrial reshoring in the semiconductor industry and vehicle electrification will also contribute to the trend.
"That kind of spike in power demand hasn't been since in the U.S. since the early years of the century," wrote Goldman Sachs analysts in a recent note. And investors can position their portfolios to benefit from AI-driven demand for electricity by buying shares of the little-known Vanguard Utilities ETF (NYSEMKT:VPU).
Here are the important details.
The Vanguard Utilities ETF provides diversified exposure to electric utilities
The Vanguard Utilities ETF tracks the performance of 66 U.S. companies that come from the utilities sector. The index fund is most heavily invested in electricity distributors (62%) and companies that provide multiple utility services (25%), though it also includes water and gas utilities, and independent power producers.
The 10 largest holdings in the Vanguard Utilities ETF are listed by weight below:
- NextEra Energy: 12.2%
- Southern Company: 7.2%
- Duke Energy: 6.7%
- Constellation Energy: 6.2%
- Sempra Energy: 3.9%
- American Electric Power: 3.9%
- Dominion Energy: 3.7%
- Public Service Enterprise Group: 3.3%
- Vistra Energy: 3.2%
- PG&E: 3.1%
Importantly, seven of the 10 stocks listed above have generated better returns than the S&P 500 year to date, inclusive of dividends, as of Nov. 19. Vistra tops the list with a total return exceeding 300%. That speaks to its position as the largest competitive power generator in the U.S., and its status as the second-largest nuclear power company in terms of generation capacity.
Constellation Energy is the second-best performing stock on the list with a total return of 100% year to date. That speaks to its dominance in nuclear power. AI data centers are five times more energy-intensive than traditional data centers, and some experts see nuclear energy as a good solution because it's more reliable than other sources of clean energy like wind and solar.
Image source: Getty Images.
The Vanguard Utilities ETF has underperformed the S&P 500 over the long-term
The Vanguard Utilities ETF has narrowly outperformed the S&P 500 over the past year, but the index fund has consistently underperformed over longer periods, as shown in the chart below.
| Time Period | Vanguard Utilities ETF Return | S&P 500 Return |
|---|---|---|
| 3 years | 29% | 31% |
| 5 years | 45% | 105% |
| 10 years | 140% | 245% |
Data source: YCharts. Note: Returns shown are accurate as of November 19, 2024.
For shareholders, the silver lining to long-running underperformance has been below-average volatility. The Vanguard Utilities ETF has a three-year beta of 0.72. That means the index fund moved 72 basis points (i.e., 0.72 percentage points) for every 100-basis point movement in the S&P 500.
The last item of consequence is the expense ratio. The Vanguard Utilities ETF has a below-average expense ratio of 0.1%, meaning shareholders will pay $1 annually on every $1,000 invested in the fund. By comparison, Vanguard says the average fee on similar funds as 0.99%, and Morningstar says the average expense ratio across all index funds and mutual funds was 0.36% in 2023.
Here's the bottom line: The Vanguard Utilities ETF provides investors with relatively low-risk exposure to the AI boom. While it has underperformed in the past, the fund could outperform as electricity demand surges. Either way, investors that can handle volatility should also consider exposure to the technology sector, either through index funds or individual AI stocks.
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Trevor Jennewine has positions in Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends Goldman Sachs Group, Microsoft, NextEra Energy, Nvidia, and Palantir Technologies. The Motley Fool recommends Constellation Energy, Dominion Energy, and Duke Energy and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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