Although the U.S. economy has grown over the past twenty years, electricity usage has remained flat, largely because of the adoption of energy-saving innovations such as LED lighting and advanced home appliances. During this time, the utilities sector lagged behind the S&P 500 ( ^GSPC 0.53%) by a margin of 280 percentage points.
Now, Goldman Sachs projects that U.S. electricity usage will rise by 2.4% per year through 2030, marking the fastest pace of growth since the internet boom of the 1990s. This surge in demand is expected to result from the intersection of three significant trends.
- Electrification: Both businesses and individuals are shifting away from fossil fuels, opting instead for electric vehicles and electric-powered industrial machinery.
- Industrial reshoring: To sidestep tariffs introduced by President Trump, companies are increasingly motivated to manufacture goods domestically.
- Artificial intelligence: As AI applications expand and models grow more sophisticated, data centers are consuming more electricity.
These factors are already influencing the stock market. So far this year, the utilities sector has climbed 23%, outperforming the S&P 500 by 10 percentage points. With electricity consumption expected to keep rising, these above-average returns could persist through 2030, offering investors a rare opportunity by investing in the Vanguard Utilities ETF ( VPU -0.32%).
Here’s what you need to know.
Image credit: Getty Images.
The Vanguard Utilities ETF offers access to the largest electricity producers and suppliers
The Vanguard Utilities ETF mirrors the performance of 69 utility companies in the U.S. While it is primarily focused on electric utilities, it also includes exposure to gas, water, and diversified utility firms, as well as independent power producers. The top 10 holdings by portfolio weight are as follows:
- NextEra Energy: 10.3%
- Constellation Energy: 6.8%
- Southern Company: 6.6%
- Duke Energy: 6.4%
- Vistra: 4%
- American Electric Power: 3.9%
- Sempra Energy: 3.9%
- Dominion Energy: 3.4%
- Xcel Energy: 3.1%
- Exelon: 3%
Of these ten companies, nine have delivered better returns than the S&P 500 so far this year, with Sempra being the only exception. Notably, Constellation Energy, Vistra, and American Electric Power have posted especially impressive gains.
- Constellation Energy leads the nation in carbon-free energy production and is the top competitive retail electricity supplier in the U.S. Its stock has surged 81% this year.
- Vistra stands as the foremost competitive power generator and the second-largest competitive retail electricity supplier in the country. Its shares have risen 53% year to date.
- American Electric Power is among the biggest regulated electricity producers and owns the largest power transmission network in the U.S. Its stock is up 29% this year.
The Vanguard Utilities ETF charges an expense ratio of 0.09%, which means investors pay $9 annually for every $10,000 invested. According to Vanguard, similar funds have an average expense ratio of 1.01%.
This Vanguard Utilities ETF works best when paired with other AI stocks and index funds
Over the past ten years, the Vanguard Utilities ETF has delivered a total return of 186%, or about 11% per year. In comparison, the S&P 500 returned 300% over the same period, averaging 14.8% annually. This trend has also held true for the past five years.
While I anticipate that utilities will outperform the S&P 500 in the next three to five years, investors with diversified holdings are more likely to benefit from the growth of artificial intelligence (AI). There are many individual AI stocks worth considering, but it’s also wise to look at an S&P 500 index fund.
The S&P 500 features some of the world’s most influential companies, and over half of the firms in the index referenced AI in their most recent earnings reports. Historically, the S&P 500 has been a strong long-term investment, outperforming most other asset classes in the last decade, including fixed income, international stocks, precious metals, and real estate benchmarks.
