This ETF is Crushing the S&P 500. Here's Why It's a Simple Way to Invest in AI While Generating Passive Income from High-Yield Stocks.

Key Points

• Utilities aren’t just a safe sector with limited growth prospects.

• Forecasts call for a ramp-up in electricity demand.

• Utilities must invest in infrastructure to expand their power supply and meet growing demand.

• 10 stocks we like better than Vanguard Utilities ETF ›

The S&P 500 (SNPINDEX: ^GSPC) is having another great year, up 9.9% year to date at the time of this writing. But it may surprise investors to learn that the seemingly boring utility sector is doing even better.

The Vanguard Utilities ETF (NYSEMKT: VPU) is an excellent way to invest in the U.S. utility sector. Instead of focusing on one region, it holds dozens of stocks across the industry -- which is a good way to achieve diversification. The majority of the fund is in electric utilities and multi-utilities that offer a range of services.

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The fund sports a mere 0.09% expense ratio, or less than a dollar in fees for every $1,000 invested. And with a 2.7% yield and a 21.4 price-to-earnings ratio, the fund is an excellent source of passive income at a good value.

Here's why the exchange-traded fund (ETF) could be a simple way to boost your dividend income and get upside potential from artificial intelligence (AI).

Image source: Getty Images.

Joining in on the rally

There are five sectors outperforming the S&P 500 in 2025 -- industrials, communication services, utilities, technology, and financials.

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Industrials and financials can be cyclical, benefiting from investor optimism and economic expansion. Similarly, communications and technology are chock-full of red-hot names -- like "Ten Titans" stocks Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), Meta Platforms, and Netflix in the communications sector and Nvidia, Microsoft (NASDAQ: MSFT), Broadcom, and Oracle (NYSE: ORCL) in the tech sector.

However, utilities tend to be a defensive sector that investors flock to during times of uncertainty, rather than broader market rallies. Under normal circumstances, one may expect utilities to underperform in lockstep with other value-focused sectors, such as healthcare and consumer staples.

But the utility sector is at an inflection point -- driven by AI and the energy transition.

AI is driving electricity demand

Big tech companies are investing significant resources in building cloud infrastructure. Microsoft Cloud and Google Cloud are spending aggressively and gaining ground on the industry leader -- Amazon (NASDAQ: AMZN) Web Services.

Meanwhile, Oracle's capital expenditures (capex) have skyrocketed in recent years as it builds out Oracle Cloud Infrastructure, complementing its legacy database services to create a comprehensive cloud platform for enterprise clients. Oracle is spending so much that its capex is higher than its operating income, so it is taking on debt to fund its growth aspirations.

Data centers are extremely energy-intensive and will require more power for building and interconnections. According to a report published by the U.S. Energy Information Administration on July 31, nationwide U.S. electricity sales to customers that purchase for direct use rather than resale is expected to increase by 2.2% per year in 2025 and 2026, which is higher than the average growth rate of 0.8%. AI is driving a significant part of the uptick, but what's more telling is the trend in electricity usage in areas where numerous data centers are being built.

Texas has its own grid, called the Electric Reliability Council of Texas (ERCOT). The PJM Interconnection is a regional entity that spans multiple Mid-Atlantic states. EIA said the following in its July 31 analysis:

We expect electricity demand within ERCOT to increase by 7% in 2025 and by 14% in 2026 when some large data centers and cryptocurrency mining facilities come online. We expect retail electricity sales in the broader West South Central Census Division to grow by 5% this year and 9% in 2026.

With many data centers being built in Virginia, the EIA is focusing on PJM electricity demand increasing by 3% in 2025 and 4% in 2026.

These upticks in demand are a boon for utilities operating in these regions, such as Southern Company in the Southeastern U.S., Dominion Energy in the Mid-Atlantic, and American Electric Power and CenterPoint Energy in Texas.

A sustainability-minded customer base

The buildout of U.S infrastructure to support data centers will require contributions from both renewable energy and fossil fuels like natural gas. Many utilities have been investing heavily in renewable energy to achieve their sustainability goals and diversify their energy mix. And there's even more incentive to do so now because many of the top cloud computing companies have ambitious sustainability goals.

In 2023, Amazon achieved its goal to match all the electricity consumed across its operations, including data centers, with 100% renewable electricity -- a goal it initially set for 2030. Amazon isn't refusing to power a data center with natural gas, but it is ensuring that it can offset that climate impact through renewable energy purchases or renewable energy certificates (RECs).

Policy pressure on renewables, such as the phase-out of some federal credits under the "big, beautiful bill," is a challenge for renewable energy projects and RECs. However, AI-related demand is driving companies to sign power purchase agreements (PPAs), where they directly invest in renewable energy projects. That direct demand is what's driving the EIA's forecast.

In January, Amazon said that it was the largest corporate purchase of renewable energy globally for the fifth year in a row as it works toward reaching net-zero carbon emissions by 2040. Microsoft has signed several massive PPAs, such as its 335 megawatt deal with Clearway Energy for a wind farm in West Virginia. Similarly, Google is spending billions on clean energy to power its operations.

An AI play for income and value investors

The utility sector benefits from the steady increase in energy demand as the population and economy grow. AI adds to that core investment thesis by demanding much higher power capabilities from the already strained grid.

There are plenty of ways to invest in AI, including through mega-cap growth stocks like the "Ten Titans." But some investors may prefer going with the Vanguard Utilities ETF as a way to indirectly invest in AI without overpaying for high-flying growth stocks or compromising on passive income.

Should you invest $1,000 in Vanguard Utilities ETF right now?

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Daniel Foelber has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, Netflix, Nvidia, and Oracle. The Motley Fool recommends Broadcom and Dominion Energy and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.