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When it comes to investing there are company specific themes to consider and also larger, industry wide themes. One of the biggest themes playing out right now is the increase in demand for electricity, which is actually backed by the rise in AI, the increased use of cloud computing, and the steadily growing number of electric vehicles (EVs) on the road.
If you don’t want to pick through the utility sector, considering every company-specific storyline, you can make a smart and easy investment in Vanguard Utilities Index Fund ETF(NYSEMKT: VPU).
Here’s what you need to know.
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The easy way to think about Vanguard Utilities Index Fund ETF is that it buys a diversified basket of utility stocks. The truth is that’s probably enough of an understanding here to justify the investment for anyone looking to invest in the utility sector. But there are still some important nuances that are worth considering.
For example, Vanguard Utilities Index Fund ETF tracks an index. That index is the MSCI US Investable Market Utilities 25/50 Index. The utility part of the index name is fairly easy to understand, but the 25/50 is a bit more arcane.
There are diversification rules involved in an exchange-traded fund if it plans to describe itself as diversified. The 25/50 designation means that no single investment will represent more than 25% of the index’s assets and the total weighting of all of the holdings making up 5% or more of assets won’t account for more than 50% of the index’s assets. The 25/50 designation is, basically, a statement that the ETF is diversified.
But there’s more to this story, because the MSCI US Investable Market Utilities 25/50 Index also looks at market cap. It specifically includes large-, mid-, and small-cap U.S. utilities. As you might expect, large-cap utilities make up the bulk of the portfolio, but you aren’t simply buying large caps. You are truly getting a diverse list within the portfolio, which includes around 65 or so stocks.
All in, if you want exposure to the utility sector, Vanguard Utilities Index Fund ETF is a solid option. And its 2.8% dividend yield, while not exactly huge on an absolute basis, is well above what you’d get from an S&P 500 index (SNPINDEX: ^GSPC ) fund. And Vanguard Utilities Index Fund ETF’s expense ratio is a modest 0.09%.
So Vanguard Utilities Index Fund ETF is an attractive way to get exposure to the utility sector. The real reason to buy broad exposure to utilities with this exchange-traded fund is that electricity demand is about to see a step change higher. As noted above, the list of reasons includes the huge electricity demands of artificial intelligence. And the increasing use of data centers as the world embraces cloud computing. And the ongoing shift toward electric vehicles and away from internal combustion engine vehicles. A growing population helps, too.
But the numbers are truly shocking. For example, AI and data centers are expected to see a 300% increase in electricity demand over the next decade. EVs are projected to see a 9,000% increase in electricity demand through 2050. All in, the National Electrical Manufacturers Association is expecting electricity use to increase from 21% of final energy use today to 32% by 2050.
That’s an 11 percentage point increase over roughly 25 years, which may not seem like a big change. Only, it is a huge change.
NextEra Energy, one of the largest electric utilities in the United States, highlights that electricity demand grew 9% between 2000 and 2020. That figure isn’t an annualized growth rate, it is the total amount of growth over the entire 20-year period. It has been rough sledding for utilities.
However, between 2020 and 2040 electricity demand is expected to increase by 55%. The once sleepy utility sector looks like it is about to become a far more growth oriented sector. You quickly and easily can buy into that long-term growth with Vanguard Utilities Index Fund ETF.
The utility sector isn’t likely to take off like a rocket ship, that’s just not how the sector works. It is more likely to be a slow and steady march higher, as utilities across the country invest to support growing demand. And you can invest along with them if you buy Vanguard Utilities Index Fund ETF today.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool has a disclosure policy.
