Artificial intelligence (AI) is all the rage today, with investors hopping on any company that even mentions the technology. For example, the incoming CEO of Opendoor set off a meme-stock frenzy when integrating AI was highlighted as a key priority.
But you don't have to buy Wall Street's most-loved story stocks to get involved in AI. You can buy this "boring" Vanguard exchange traded fund (ETF) instead. Here's what you need to know.
Artificial intelligence is hungry for power
While this subhead has overtones of a dystopian future, it is really just a statement of fact. Artificial intelligence uses vast amounts of electricity. Or, more to the point, the data centers that house the computers in which AI software is run use a lot of power. This is not a small issue, since AI basically doesn't work without a reliable supply of electricity.
Image source: Getty Images.
By some estimates, electricity demand from data centers is projected to increase by roughly 300% over the next decade. Add in demand from electric vehicles, and electricity is projected to increase from 21% of final energy use in the United States to 32% by 2050. NextEra Energy, one of the largest utilities in the country, is projecting electricity demand to increase 55% between 2020 and 2040. That's a massive step change from the 9% growth witnessed between 2000 and 2020.
In other words, the AI boom is a huge opportunity for electric utilities. That will play out over a decade, and longer, as these businesses make the huge capital investments needed to support AI's growing power demands.
You could try to pick individual winners by adding companies like NextEra Energy to your portfolio. However, the benefit from AI will likely be broadly distributed across the entire utility industry.
Vanguard Utilities Index ETF to the rescue
That's where Vanguard Utilities Index ETF (VPU 0.15%) comes in. Instead of trying to cherry-pick stocks, you can punt and just buy into the entire sector -- and do it on the cheap, too, given that Vanguard Utilities Index ETF has an ultra-low expense ratio of just 0.09%.
There's nothing overly special about what Vanguard Utilities Index ETF does. It effectively tracks the utility sector with a portfolio of roughly 70 stocks. At the top of the list is NextEra Energy, followed by all the big names you would expect, including industry giants like Southern Company, Duke Energy, and American Electric Power. The stocks are market cap-weighted, so the largest companies have the biggest impact on the ETF's performance.
Electricity plays a material role in around 90% of the exchange-traded fund's portfolio, when looking at it as a percentage of assets. That includes electric utilities (61% of assets), multi-utilities (24%), and independent power producers (6%). If rising electricity demand leads to rising utility stock prices, this ETF will benefit. And all you need to do is make one decision to participate, not sort through a dozen stock picks.
There's more demand upside ahead
To be fair, Wall Street isn't ignoring the opportunity here. The Vanguard Utilities Index ETF is up 15% over the past year, which is better than the roughly 13% advance for the S&P 500 (^GSPC 1.07%).
But this is not a one-year phenomenon, as the demand outlook for electricity is expected to be strong for decades to come. And if you buy Vanguard Utilities Index ETF, you can get in during what is still likely to be the early innings of a very long game. AI is going to be the first big story, with EVs likely to drive the story even further in the decades ahead.
