Forget Nvidia: This Utility ETF Could Pay Off as AI Runs on Electricity
The chips get the headlines but the power companies might keep the profit.
We all know the script. Nvidia has been the face of the artificial intelligence revolution. Microsoft and Alphabet are the giants everyone already owns. But if you are hunting for the next big winner in this boom, you might be looking in the wrong place. The rush to invest in chips is loud, but the demand for electricity is louder. If you want to profit from the AI boom without just betting on chip makers, there is a different path. The Vanguard Utilities ETF might be the answer you are looking for.
Here is the practical reality. Artificial intelligence does not run on dreams or hype. It runs on staggering amounts of electricity. Building an AI model requires advanced chips. Running those chips requires massive data centers. And those data centers require a power grid that is constantly on the brink of overload. This has become one of the biggest constraints in the industry. Consider the recent announcement involving Nvidia. The company agreed to provide over $100 billion to support OpenAI's new data center project in Ohio. The site is expected to reach 8 gigawatts of capacity eventually. That amount of power from a single location is enormous and becoming increasingly common.
AI companies can buy all the graphics processing units they want. But those chips are not going to be particularly useful without a stable supply of electricity to run them. That is where the Vanguard Utilities ETF enters the picture. This exchange-traded fund owns roughly 70 stocks that generate, transmit, and distribute electricity. The fund includes names you probably know. These include NextEra Energy, Southern Company, Duke Energy, Constellation Energy, and American Electric Power. Together, these companies form the backbone of the energy infrastructure that an expanding network of data centers will require.
Utilities are often viewed as slow-growth income investments. They are the boring part of a portfolio that pays a steady check. However, electricity demand from AI could significantly improve the sector's growth prospects. More data centers mean greater demand for capacity, grid upgrades, and other infrastructure. Utilities that can successfully invest in that expansion could potentially grow their earnings faster than investors have historically expected. The Vanguard Utilities ETF currently offers a dividend yield of roughly 2.7%. This gives you current income while you gain exposure to a sector that could see years of rising demand.
Investors should recognize the risks here. More electricity demand does not automatically mean enormous profits for utilities. These companies are highly regulated. There can be restrictions on how much they return on capital investments. Of course, there is also the public pushback from people who do not want massive data centers in their communities. Furthermore, the Vanguard Utilities ETF is not cheap by historical standards. Investors have already begun to recognize the potential growth opportunity.
Would you buy this ETF for the AI boom? Yes, but not as a replacement for your tech stocks. I would not replace semiconductor or technology exposure in my portfolio. The Vanguard Utilities ETF provides a different type of exposure and can augment traditional tech coverage. The biggest winners from AI will not necessarily be just the companies designing chips. The infrastructure underneath the ecosystem can be just as valuable. Before another AI data center can generate a single dollar of revenue, somebody has to power it. This is the hidden cost of the AI revolution that investors are just starting to notice.
First reported by The Motley Fool.
More in Business
- IMF Chief Warns of Economic Divergence and Debt Risks Amid Artificial Intelligence Boom
Kristalina Georgieva suggests that while AI could significantly boost global growth, it simultaneously threatens to widen inequality and exacerbate inflationary pressures and public debt burdens.
- California Limits Utility Profits and Expands Home Energy Role
Gov. Gavin Newsom signed laws capping utility returns on lower-risk projects and accelerating virtual power plant development.
- Lyft to Pay $272.5 Million in Record California Wage-Theft Settlement
Largest such settlement in state history resolves claims that Lyft misclassified drivers as independent contractors from 2016 to 2020, denying them core wage protections.