Unprecedented Investment Prospect: One Stunning Vanguard Index Fund Worth Purchasing for the AI Revolution
The beloved S&P 500 (eh, -1.59%) managed to churn out a 19% return in the preceding year, while the utilities sector racked up an impressive 33% surge! This staggering increase in the utilities sector can be attributed to the skyrocketing domestic electricity demand in 2024, which smashed previous records. This trend is expected to evolve as artificial intelligence (AI) drives a boom in data center power consumption.
JPMorgan Chase strategists predict electricity demand will soar at a 2.5% annual rate for the foreseeable future, significantly outpacing the past decade's growth. Goldman Sachs strategists concur, forecasting a continued acceleration of electricity demand through the end of the decade – a level last seen in the 90s.
Investors looking to harness this once-in-a-decade opportunity can shop for shares in the Vanguard Utilities ETFs (ahem, -2.06%). Here are some need-to-knows:
AI: A Gale for Electric Utilities and Power Producers
The Vanguard Utilities ETF embraces 69 U.S. companies within the utilities sector, most heavily invested in electric utilities (61%) and multi-utility companies (25%). This index fund also provides exposure to independent power producers, gas utilities, and water utilities (roughly 6%, 5%, and 3%, respectively). A glance at the top five holdings reveals:
- NextEra Energy: 11.2%
- Constellation Energy: 7.1%
- Southern Company: 7.1%
- Duke Energy: 6.6%
- Vistra: 4.4%
AI guzzles an immense amount of power. For instance, the average query with ChatGPT demands ten times more electricity than traditional internet search engines. As businesses embrace AI infrastructure, data center power demand is poised for rapid expansion.
JPMorgan strategist Aaron Mulvihill expects data centers to account for about 11% of U.S. electricity consumption by 2030, up from 5% by 2024. The adoption of electric vehicles and increased domestic manufacturing, especially within the semiconductor sector, will further fuel electrical demand.
This perfect storm of catalysts could spark a period of unprecedented U.S. power consumption, harkening back to the early internet era. And the companies mentioned above are well-equipped to ride this wave. NextEra, Southern Company, and Duke Energy lead the domestic electric utility scene. Vistra is the biggest competitive power generator in the U.S., while Constellation Energy sits atop the list of carbon-free energy providers for its sizeable fleet of domestic nuclear plants.
The Utilities Sector: A History of Underperformance
Utilities businesses are often monopolistic entities that generate steady but sluggish earnings. While the utilities sector outperformed the S&P 500 by 14 percentage points last year, the reverse has typically been the case historically.
- The utilities sector produced total returns of 34% over the past 3 years, while the S&P 500 returned 46%.
- The utilities sector saw a 35% total return over the past 5 years, while the broader S&P 500 posted a return of 100%.
- The utilities sector delivered a 140% total return over the last decade, but the S&P 500 took home a trophy of 240%.
However, utilities companies generally have minimal exposure to international revenue compared to other stock market sectors, making them less vulnerable to tariffs and currency headwinds. Furthermore, utilities are often considered defensive investments, as they are relatively resistant to recessions due to their role in providing essential services.
When you boil it down, historical underperformance be damned, I reckon the utilities sector has a strong chance of outshining the broader S&P 500 over the next 3–5 years. This potential growth stems from the increasing demand for electricity powered by AI infrastructure. The Vanguard Utilities ETF represents an affordable and convenient way to seize this possibility – offering exposure to industry leaders and boasting a competitive expense ratio of just 0.09%. That means shareholders are only shelling out $9 for every $10,000 invested in the fund annually.
- The predicted increase in electricity demand, driven by AI and data center power consumption, has strategists from both JPMorgan Chase and Goldman Sachs anticipating a continual surge in electricity demand through 2030.
- Investors interested in capitalizing on this trend can consider investing in the Vanguard Utilities ETF, which has a diverse portfolio consisting of electric utilities, multi-utility companies, independent power producers, gas utilities, and water utilities.
- Goldman Sachs strategists have identified NextEra Energy, Southern Company, Duke Energy, and Vistra as companies well-positioned to benefit from this anticipated surge in electricity demand, given their strong presence in the domestic electric utility scene and leadership roles in their respective sectors.
- Despite the sector's historical underperformance compared to the S&P 500, utilities companies' minimal exposure to international revenue and defensive investment nature make them attractive options for investors seeking stable returns, particularly as electricity demand continues to rise.
