The Best Undercover ETF to Play the AI Boom

AI requires power…a lot of power.

Forecasts call for energy consumption to double in 2024 from 2023, driven by AI and data center needs.

It’s so dire, states now see mothballed nuclear power plants as potential solutions. 

According to our TrackStar data, investors believe utility stocks are the best way to play this trend.

State Street’s XLU ETF is their top choice based on search volume.

At all-time highs, this ETF jumped over 25% year-to-date, not including its nearly 3% dividend yield.

That’s a massive gain for a typically sleepy sector.

But is it the best way to play the AI power boom?

Key Facts About XLU

• Net assets: $18.6 billion
• 12-month trailing yield: 2.77%
• Inception: December 16, 1998
• Expense ratio: 0.09%
• Number of holdings: 33

When we think of utilities, we almost always assume electricity. However, utilities cover a broader range of companies, including water and gas.

We’re unaware of any electricity-only utility ETF outside of owning individual companies.

So, if you want diversification, utility ETFs are the way to go.

The XLU is one of the most well-known in the sector. It trades over 11 million shares daily and has weekly option expirations.

The ETF holds 33 of the largest utilities in the U.S. and is weighted by market capitalization.

Source: State Street

While electric utilities make up two-thirds of the ETF’s holdings, multi-utilities often generate most of their revenues from electricity.

Source: State Street

Performance

Utility companies aren’t known for exceptional returns. They typically pay consistent dividends with some but very little capital appreciation.

Source: State Street

That dynamic has changed recently, as investors are now examining the massive capital projects needed to meet our energy needs.

Competition

While the XLU is the most popular utilities ETF, several others are worth considering, including a leveraged sector ETF.

• Vanguard Utilities ETF (VPU): VPU is similar to the XLU as a market-cap-weighted ETF but holds double the XLU’s U.S. utility stocks.
• Direxion Daily Utilities Bull 3X Shares (UTSL): UTSL is a leveraged ETF that seeks to deliver 300% of the daily performance of the Utilities Select Sector Index.
• iShares Global Utilities ETF (JXI): JXI is a market-cap-weighted ETF providing global exposure to utility companies instead of just the U.S. market.
• Virtus Reaves Utilities ETF (UTES): UTES is an actively managed ETF focusing on U.S. utility stocks, aiming for stable growth and income with no strict weighting methodology, giving it more flexibility compared to passive funds.

The three passively-managed ETFs all have similar performance. However, the actively managed one has nearly double the 5-year performance total, though it comes with higher fees.

Our Opinion 10/10 

Given the similarities between the passively managed utility ETFs here, we like the XLU for its deep liquidity and options.

Additionally, it is one of the oldest and has the lowest fees available.

So, for long-term investors, the XLU is an excellent choice as a core portfolio position.