U.S. electricity demand is forecast to grow at its fastest pace in decades as electrification, industrial reshoring, and artificial intelligence boost power demand.
The utilities sector underperformed the S&P 500 during the past 20 years, but robust demand for electricity could lead to outperformance in the coming years.
The Vanguard Utilities ETF provides exposure to leading power producers and electricity suppliers like Constellation Energy, Vistra, and American Electric Power.
U.S. electricity demand stagnated during the past two decades because of the introduction of energy-efficient technologies like LED lightbulbs and modern appliances. Between 2005 and 2024, electricity consumption rose at just 0.5% annually, and the utilities sector underperformed the S&P 500(SNPINDEX: ^GSPC) by 210 percentage points.
However, Goldman Sachs estimates U.S. electricity consumption will increase at 2.4% annually through 2030 as three major tailwinds converge: electrification of vehicles and industrial equipment, increased domestic manufacturing activity, and the proliferation of artificial intelligence (AI) data centers.
Electricity consumption has not increased so quickly since the internet went mainstream in the late 1990s. In that sense, the utilities sector looks more attractive today than it has in decades. Investors can position their portfolios to benefit by owning shares of the Vanguard Utilities ETF(NYSEMKT: VPU).
Here are the important details.
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The Vanguard Utilities ETF tracks the performance of 69 U.S. utility companies. The index fund is most heavily weighted toward electric utilities (63%), but it also provides exposure to gas (5%), water (3%), and multi-utility companies (23%), as well as independent power producers (6%). These are 10 largest holdings as listed by weight:
Three of the 10 stocks above have outperformed the S&P 500 year to date. Constellation Energy, Vistra, and American Electric Power. Investors have good reason to believe that outperformance will continue as the artificial intelligence (AI) boom unfolds:
Constellation is the largest producer of zero-carbon energy and the leading competitive retail supplier of power in the U.S. The stock has advanced 69% year to date.
Vistra is the leading competitive power producer and the second-largest competitive retail supplier of power in the U.S. The stock has advanced 27% year to date.
American Electric Power is one of the largest regulated power producers and it owns the largest electricity transmission network in the U.S. The stock has advanced 24% year to date.
The Vanguard Utilities ETF has an expense ratio of 0.09%, meaning shareholders will pay $9 per year on every $10,000 invested in the fund. The average expense ratio on similar funds is 1.01%, according to Vanguard.
The Vanguard Utilities ETF achieved a total return of 180% during the last decade, which is equivalent to 10.8% annually. By comparison, the S&P 500 achieved a total return of 299% during the last decade, which is equivalent to 14.8% annually. The same pattern holds over the past two decades.
I think the utilities sector can outperform the S&P 500 during the next five years, but investors hoping to benefit from the artificial intelligence revolution should still build a diversified portfolio by spreading money across other stocks and/or index funds. I think most investors should own an S&P 500 index fund such as the Vanguard S&P 500 ETF.
The S&P 500 tracks the most influential stocks in the world, many of which will benefit from AI to some degree. In fact, over 60% of companies in the index discussed artificial intelligence on the latest earnings call, according to FactSet Research. That is a new record high.
More importantly, the S&P 500 has been profitable over every 15-year period since 1950. In other words, any investor who owned an S&P 500 index fund turned a profit regardless of when they bought shares provided they held the fund for at least 15 years. That makes an S&P 500 index fund a compelling investment idea.
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Trevor Jennewine has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Constellation Energy, FactSet Research Systems, Goldman Sachs Group, and Vanguard S&P 500 ETF. The Motley Fool recommends Dominion Energy and Duke Energy. The Motley Fool has a disclosure policy.
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