The benchmark S&P 500 (^GSPC +1.20%) returned 19% in the past year, while the utilities sector surged 33% as domestic electricity demand reached a record high in 2024. That shocking trend (bad pun intended) is likely to continue as artificial intelligence boosts data center power consumption.
JPMorgan Chase strategists estimate electricity demand will increase at 2.5% annually over the next several years, growing more than three times faster than in the previous decade. Similarly, Goldman Sachs strategists expect electricity demand to accelerate "through the end of the decade to levels not seen in 20+ years."
Investors can position themselves to benefit from that once-in-a-decade opportunity by owning shares of the Vanguard Utilities ETFs (VPU 0.40%). Here are the important details.
NYSEMKT: VPU
Key Data Points
Artificial intelligence is a tailwind for electric utilities and power producers
The Vanguard Utilities ETF tracks 69 U.S. companies in the utilities sector. The index fund is most heavily weighted toward electric utilities (61%) and multi-utility companies (25%), but also provides exposure to independent power producers (6%), gas utilities (5%), and water utilities (3%). The five largest holdings are listed by weight below:
- NextEra Energy: 11.2%
- Constellation Energy: 7.1%
- Southern Company: 7.1%
- Duke Energy: 6.6%
- Vistra: 4.4%
Artificial intelligence (AI) consumes a tremendous amount of power. On average, ChatGPT requires 10 times more electricity per query than traditional internet search engines. As a result, data center power demand is forecast to increase rapidly as businesses continue to invest in AI infrastructure.
JPMorgan strategist Aaron Mulvihill estimates data centers will account for about 11% of U.S. electricity consumption by 2030, up from about 5% in 2024. Meanwhile, adoption of electric vehicles and increased domestic manufacturing activity (especially semiconductors) should also contribute to demand for electricity.
Collectively, those catalysts could drive the kind of growth in U.S. power consumption that hasn't been seen since the early days of the internet. And the companies listed above are well positioned to benefit. NextEra, Southern Company, and Duke Energy are the largest domestic electric utilities. Vistra is largest competitive power generator in the U.S., and Constellation is the largest producer of carbon-free energy because it owns the largest fleet of domestic nuclear plants.
Image source: Getty Images.
The utilities sector has historically underperformed the S&P 500
Utilities companies are often legal monopolies that generate consistent but slow-growing earnings. As a result, while the utilities sector bested the S&P 500 by 14 percentage points in the past year, the opposite has historically been true.
- The utilities sector achieved a total return of 34% over the last three years, while the S&P 500 returned 46%.
- The utilities sector achieved a total return of 35% over the last five years, while the S&P 500 returned 100%.
- The utilities sector achieved a total return of 140% in the last decade, while the S&P 500 returned 240%.
However, utilities companies have less exposure to international revenue than other stock market sectors, so they are least likely to be hurt by tariffs and currency headwinds. Additionally, utilities companies are typically seen as defensive investments because they provide essential services, which means they are somewhat resistant to recessions.
Here is the bottom line: Historical underperformance notwithstanding, I think the utilities sector has a good shot at beating the broader S&P 500 over the next three to five years as artificial intelligence infrastructure boosts data center electricity consumption. The Vanguard Utilities ETF is a cheap and easy way to capitalize on that possibility. It offers exposure to leading electric utilities and power producers, and its below-average expense ratio of 0.09% means shareholders will pay only $9 per year on every $10,000 invested in the fund.
