AI Sparks New Energy Trends: A Closer Look at the Vanguard Utilities ETF
Artificial intelligence (AI) is poised to become a pivotal technology in the upcoming decade. Bill Gates, co-founder of Microsoft, believes AI’s impact will be comparable to that of the microprocessor, personal computer, internet, and mobile phone.
Investors eager to capitalize on the AI wave are focusing their attention on technology companies. Palantir and Nvidia have emerged as the second- and third-best performing stocks in the S&P 500 this year. However, Vistra, from the often overlooked utilities sector, is leading the index as its top performer.
Rising Power Demands in the Age of AI
U.S. electricity demand is set to rise by 2.4% annually until 2030, primarily driven by AI data centers. By the end of the decade, these centers are expected to consume 8% of U.S. power—a figure more than double their consumption in 2022. Additionally, factors like industrial reshoring in the semiconductor industry and vehicle electrification will further fuel this demand.
Goldman Sachs analysts noted in a recent report, “That kind of spike in power demand hasn’t been seen in the U.S. since the early years of the century.” Investors looking to benefit from increased electricity demand tied to AI can consider investing in the Vanguard Utilities ETF (NYSEMKT: VPU).
Below are key details of the fund.
Explore the Vanguard Utilities ETF for Diverse Utility Sector Exposure
The Vanguard Utilities ETF tracks the performance of 66 U.S. utility companies. Most of its investments are in electricity distributors (62%) and firms providing multiple utilities (25%), along with water and gas utilities, and independent power producers.
Here are the 10 largest holdings in the Vanguard Utilities ETF by weight:
- 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%
Notably, seven of the 10 stocks listed above have surpassed the S&P 500 in returns this year, including dividends, as of November 19. Vistra leads with a total return exceeding 300%, reflecting its status as the largest competitive power generator in the U.S. and the second-largest nuclear power company by generation capacity.
Constellation Energy follows closely as the second-best performer on the list, achieving a total return of 100% this year, highlighting its strength in nuclear energy. Given that AI data centers use five times more energy than traditional ones, there is a growing belief among experts that nuclear energy is a more stable solution than renewable methods like wind or solar.
Image source: Getty Images.
Long-term Trends Show Vanguard Utilities ETF Underperformance
While the Vanguard Utilities ETF has slightly outperformed the S&P 500 over the last year, it has lagged behind over longer timeframes, as shown in the following table.
| 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 investors, the upside of this historical underperformance lies in its lower volatility. The Vanguard Utilities ETF has a three-year beta of 0.72, indicating that it moves 72 basis points for every 100-basis point movement in the S&P 500.
Another key aspect is the expense ratio. The Vanguard Utilities ETF has a competitive expense ratio of 0.1%, meaning investors pay just $1 annually on a $1,000 investment. In contrast, Vanguard cites the average fee for similar funds as 0.99%, while Morningstar reported an average expense ratio of 0.36% across all index and mutual funds in 2023.
In summary, the Vanguard Utilities ETF offers a relatively low-risk avenue for gaining exposure to electric utilities amidst the AI boom. Although it has faced challenges in the past, the fund may thrive as electricity demand heightens. Meanwhile, investors comfortable with more volatility should also explore technology stocks or AI-specific index funds.
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*Stock Advisor returns as of November 18, 2024
Trevor Jennewine holds 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 options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool follows a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
