This Vanguard Index Fund Is a Once-in-a-Decade Buying Opportunity for the Artificial Intelligence (AI) Boom

The Vanguard Utilities ETF (VPU -0.23%) has returned 30% year to date, outstripping the 23% return in the S&P 500 (^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 premise that artificial intelligence will boost energy consumption.

Goldman Sachs estimates U.S. electricity demand will increase at 2.4% annually through 2030. “That kind of spike in power demand hasn’t been seen in the U.S. since the early years of this century,” analyst commented. Importantly, the utilities sector outperformed the S&P 500 by 65 percentage points between January 2000 and December 2010, the most recent period characterized by soaring electricity demand.

That does not mean the Vanguard Utilties ETF will outperform the S&P 500 in the coming years, though that outcome is certainly plausible. Artificial intelligence should be the biggest catalyst in over a decade for electric utilities, and the index fund is an easy way to capitalize on that opportunity.

The Vanguard Utilities ETF provides diversified exposure to stocks in the utilities sector

The Vanguard Utilities ETF tracks the performance of 66 U.S. companies from the utilities sector. The index fund is heavily invested in electric utilities, though it also provides exposure to water and gas distributors, and independent power producers. It bears a below-average expense ratio of 0.1%, meaning shareholders will pay $1 annually on every $1,000 invested.

The 10 largest holdings in the Vanguard Utilities ETF are listed by weight below:

1. NextEra Energy: 12.9%
2. Southern Company: 7%
3. Duke Energy: 6.6%
4. Constellation Energy: 6.1%
5. American Electric Power: 4%
6. Sempra: 3.9%
7. Dominion Energy: 3.6%
8. Public Service Enterprise Group: 3.3%
9. Vistra: 3.1%
10. Exelon: 3%

Data center electricity demand is forecast to climb 35 gigawatts (GW) by the end of the decade, according to the Federal Energy Regulatory Commission. That estimates implies data centers will consume 9% of electricity generated in the U.S. by 2030, which is about twice the amount of energy they consume today.

Artificial intelligence (AI) is a major reason for that projection. AI workloads consume more power than general-purpose data center workloads. For instance, ChatGPT requires nearly 10 times more power per query than a traditional search engine. But AI is by no means the only reason data center power demand will increase.

The ongoing adoption of cloud computing will also play an important role in driving energy consumption higher. Indeed, Goldman Sachs estimates data center power demand will rise 160% by 2030. “This increased demand will help drive the kind of electricity growth that hasn’t been seen in a generation,” analysts noted.

Many companies listed above are well positioned to benefit. For instance, NextEra Energy owns the largest electric utility in the U.S., as well as the largest generator of wind and solar energy in the world . Likewise, Vistra has the largest power generation capacity the U.S., and it is the largest residential retail electricity provider.

Importantly, nuclear power producers could exhibit particularly strong growth. Experts see nuclear power as a good solution to growing data center electricity demand because it is emission-free and more reliable than renewables like wind and solar. In terms of generation capacity, the three largest nuclear power companies are Constellation Energy, Vistra, and Public Service Enterprise Group.

The Vanguard Utilities ETF is a good option for risk-averse invetors

The Vanguard Utilities ETF returned 147% during the last decade, which equates to annualized gains of 9.4%. Comparatively, the S&P 500 advanced 252% over the same period, compounding at 13.4% annually. That dramatic underperformance is a risk for prospective 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 moved 48 basis points for every 100-basis-point movement in the S&P 500 during the last decade.

Here’s the bottom line: The Vanguard Utilities ETF has generally underperformed during bull markets, and outperformed during bear markets. Indeed, while the index fund has beat the S&P 500 year to date, it has still dramatically underperformed since the current bull market started in October 2022. All things considered, it is a good choice for risk-averse investors hoping to capitalize as artificial intelligence becomes more prevalent.