Utilities Rebound As AI Powers Energy Demand: 3 ETFs To Watch

Zinger Key Points

Supporting real-time communication, data storage, and cloud-based operations to run technologies require massive energy.
AI data centers annual power consumption is anticipated to increase 10 times from 2022 and hit 90 terawatt-hours by 2026
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Utilities, the S&P 500’s biggest laggard in 2023, staged a remarkable rebound in 2024, fueled by surging electricity demand driven by artificial intelligence, electrification, and decarbonization trends.

Among the beneficiaries of this momentum are ETFs with exposure to utility stocks like GE Vernova GEV, Vistra Corp. VST and NextEra Energy NEE, which may reap the benefits of the growing energy needs of data centers.

Three ETFs that can cash in on this trend include the Utilities Select Sector SPDR Fund XLU, Vanguard Utilities ETF VPU, and Fidelity MSCI Utilities Index ETF FUTY, each offering a way to invest in a bunch of companies supporting the energy-intensive operations of data centers.

The Utilities Select Sector SPDR Fund, with an expense ratio of a mere 0.09% and assets of $16.39 billion under management, holds promise. NextEra, Constellation Energy CEG, and Vistra are among the top holdings of this fund, which mirrors the Utilities Select Sector Index as a benchmark.

The Vanguard Utilities ETF has an expense ratio of 0.10% and $8.8 billion in assets under management. This fund also gives significant weightage to NextEta, Constellation, and Vistra.

The Fidelity MSCI Utilities Index ETF is exposed to Nextra, Constellation and Vistra as well, and carries an expense ratio of 0.08%.

Why Utilities Are Thriving

We often hear the phrase “data is the new oil” these days, and data centers, the backbone of the digital world, are often overlooked as power consumers. Supporting real-time communication, data storage, and cloud-based operations to run technologies like smartphones and connected appliances requires massive electricity, and there is one sector that data centers rely on for power – utility providers.

According to the International Energy Agency, data centers and data transmission networks comprise 1%-1.5% of global electricity use.

The increasing integration of AI, which relies on energy-intensive computations, further boosts this demand. Power demand growth for utilities—historically stagnant at 1%-2% annually—is now expected to climb to about 6-8% annually for the next decade, driven by these technological trends, reported Fidelity Investments.

Utilities are traditionally a defensive sector with stability and lower sensitivity to economic fluctuations, as evident from “a lower beta relative to other sectors to the broad market,” per Fidelity.

These factors appealed to investors during a dynamic year. According to a Deloitte report, the annual power consumption of AI data centers is anticipated to increase 10 times from 2022 and hit 90 terawatt-hours by 2026. The utility sector and ETFs exposed to it appear to be on an upward trajectory.

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