Investor Interest Fuelled by AI Boom in Energy and Utilities
Interestingly, one unexpected outcome of the surge in artificial intelligence (AI) is a greater interest from investors in energy and utilities stocks. The reason? Major tech firms are establishing large AI data centers, which consume vast amounts of electricity. This trend has led to a rise in energy and utility stocks.
Recent geopolitical tensions in the Middle East, particularly surrounding the situation in Iran, have also pushed oil prices higher, further boosting oil-related stocks.
So, where do we go from here? Is this a good time to invest? Utility and energy firms are vital for powering our vehicles and our homes, yet they don’t always outpace the performance of other sectors, such as those measured by the S&P 500 index.
If you’re optimistic about a future where AI and other economic developments increase energy demand, investing in the Vanguard Energy ETF or the Vanguard Utility ETF might be worth considering. These ETFs have gained popularity, so let’s delve deeper to see if they could be good additions to your investment strategy.
Vanguard Energy ETF (VDE): 9.2% Annualized Return Over 10 Years
The Vanguard Energy ETF includes 111 stocks, focusing mainly on oil and gas companies. Notably, its leading holdings are Exxon Mobil (22% of the fund), Chevron (14.2%), and ConocoPhillips (5.8%).
This ETF boasts a low expense ratio of 0.09% and has shown an impressive return of 23.5% year-to-date. Ranked among the top energy ETFs, it has outpaced the S&P 500 over the past five years with an average annual return of 21.1%.
If you predict a rise in energy prices, this ETF could be a smart choice. Although the Vanguard Utilities ETF has a low correlation with global oil markets, its stock price tends to align more closely with oil price fluctuations.
Over the long haul, even well-performing energy ETFs might not always beat the broader market. For example, the Vanguard Energy ETF has lagged behind the S&P 500 over the last decade, documenting an average annual return of 9.2%.
Vanguard Utilities ETF (VPU): 9.4% Annualized Return Over 10 Years
The Vanguard Utilities ETF consists of 68 stocks, with a significant focus on the power sector. Key holdings include various power companies (24.5%), independent producers (5.3%), gas companies (4.7%), and water providers (2.9%). With an expense ratio sitting at a low 0.09%, it’s quite comparable to its energy counterpart.
However, the recent performance of this ETF hasn’t matched that of energy ETFs. It has delivered a return of 6.84% year-to-date, falling short of the S&P 500. This underperformance extends to both five- and ten-year averages, clocking in at 9.56% and 9.4% respectively.
Reasons to Consider VDE or VPU
Of course, there’s no guarantee that energy prices will keep climbing. They could fall, especially if tensions like the one with Iran ease. Even if the construction of AI data centers ramps up, these utility ETFs might not provide the best returns compared to AI-focused stocks.
Nonetheless, one compelling reason to consider these funds is the dividend. The Vanguard Energy ETF offers a 12-month dividend yield of 2.47%, while the Vanguard Utilities ETF provides a slightly higher yield of 2.64%. This could be appealing for those who prioritize dividend income.
Moreover, both funds have a relatively low beta compared to the broader market. The Vanguard Energy ETF has a beta of 0.09, while the Vanguard Utilities ETF sits at 0.42, indicating lower volatility in comparison to the overall stock market.
If you feel unsure about AI’s trajectory or have concerns regarding tech stock valuations, these ETFs might offer a hedge against potential downturns in the tech sector. During the recent tech market declines in 2022, both funds managed to outperform the S&P 500 and tech-heavy indices.
While historical trends aren’t always a foolproof guide, these funds can provide stability even in challenging market conditions, as seen in the past year.
