Artificial intelligence could drive the biggest increase in U.S. electricity demand since the beginning of this century.
The Vanguard Utilities ETF (VPU -0.23%) has achieved a 30% return to date, surpassing the 23% return in the US S&P500 (^GSPC -0.33%). The utilities sector rarely outperforms the broader market, but this year has been an exception. Investors have piled into utility stocks on the assumption that artificial intelligence will boost energy consumption.
Goldman Sachs estimates that U.S. electricity demand will increase 2.4% annually through 2030. “Such a spike in energy demand has not been seen in the US since the beginning of this century,” analysts said. Importantly, the utility sector outperformed the S&P 500 by 65 percentage points between January 2000 and December 2010, the most recent period marked by surging electricity demand.
That doesn’t mean the Vanguard Utilties ETF will outperform the S&P 500 in the coming years, although that outcome is certainly plausible. Artificial intelligence should be the biggest catalyst for electric utilities in more than a decade, and the index fund is an easy way to capitalize on that opportunity.
The Vanguard Utilities ETF provides diversified exposure to utilities sector stocks
The Vanguard Utilities ETF tracks the performance of 66 U.S. companies in the utility sector. The index fund invests heavily in electricity companies, but also offers positions in water and gas distributors and independent energy producers. It has a below-average expense ratio of 0.1%, meaning shareholders will pay $1 annually for every $1,000 invested.
The 10 largest holdings in the Vanguard Utilities ETF are shown below by weight:
- NextEra energy: 12.9%
- Southern company: 7%
- Duke Energy: 6.6%
- Constellation Energy: 6.1%
- American electricity: 4%
- Sempra: 3.9%
- Dominion Energy: 3.6%
- Public Service Enterprise Group: 3.3%
- Prospect: 3.1%
- Exelon: 3%
According to the Federal Energy Regulatory Commission, electricity demand in data centers is expected to increase by 35 gigawatts (GW) by the end of this decade. Those estimates imply that data centers will consume 9% of the electricity generated in the US by 2030, which is about twice the amount of energy they use now.
Artificial intelligence (AI) is a major reason for this projection. AI workloads consume more energy than general-purpose data center workloads. For example, ChatGPT requires almost 10 times more power per query than a traditional search engine. But AI is certainly not the only reason why the demand for power in data centers will increase.
The continued adoption of cloud computing will also play an important role in increasing energy consumption. Goldman Sachs estimates that demand for power in data centers will increase by 160% by 2030. “This increased demand will contribute to the kind of electricity growth not seen in a generation,” analysts noted.
Many companies mentioned above are well positioned to benefit from this. For example, NextEra Energy owns the largest electric utility in the US, as well as the largest generator of wind and solar energy in the world. Likewise, Vistra has the largest power generation capacity in the US, and is the largest residential electricity supplier.
Importantly, nuclear energy producers could show particularly strong growth. Experts see nuclear energy as a good solution for the growing demand for electricity in data centers, because nuclear energy is emission-free and more reliable than renewable energy sources such as wind and solar energy. In terms of generation capacity, the three largest nuclear energy companies are Constellation Energy, Vistra and Public Service Enterprise Group.
Image source: Getty Images.
The Vanguard Utilities ETF is a good option for risk-averse investors
The Vanguard Utilities ETF has returned 147% over the past ten years, for an annualized gain of 9.4%. By comparison, the S&P 500 advanced 252% over the same period, for a year-over-year increase of 13.4%. This dramatic underperformance is a risk for potential investors.
However, there is a silver lining. The Vanguard Utilities ETF has been much less volatile than the S&P 500, as evidenced by its 10-year beta of 0.48. That means the index fund’s share price has risen 48 basis points for every 100 basis point move in the S&P 500 over the past decade.
The bottom line: The Vanguard Utilities ETF has generally underperformed during bull markets and outperformed during bear markets. While the index fund has beaten the S&P 500 so far, it is still dramatically underperforming since the current bull market began in October 2022. All things considered, it’s a good choice for risk-averse investors hoping to capitalize on artificial intelligence. is becoming increasingly common.
Trevor Jennevine has no positions in any of the stocks mentioned. The Motley Fool holds positions in and recommends Constellation Energy, Goldman Sachs Group, and NextEra Energy. The Motley Fool recommends Dominion Energy and Duke Energy. The Motley Fool has a disclosure policy.
