A Once-in-a-Decade Investment Opportunity: 1 Vanguard Index Fund to Buy for the AI Boom

Despite increased economic activity, U.S. electricity demand stagnated during the last two decades due to the introduction of energy-efficient technologies like LED lights and modern appliances. During that period, the utilities sector underperformed the S&P 500 (SNPINDEX: ^GSPC) by 280 percentage points.

However, Goldman Sachs estimates U.S. electricity consumption will increase at 2.4% annually through 2030, the fastest growth since the internet become popular in the 1990s. That massive increase in demand will be driven by the convergence of three major trends.

• Electrification: Businesses and consumers are transitioning away from fossil fuels in favor of electric cars and electric industrial equipment.
• Industrial reshoring: Businesses have a clear incentive to manufacture more products in the U.S. to avoid tariffs imposed by President Trump.
• Artificial intelligence: Data center electricity consumption is increasing as AI workloads become more prevalent and AI models become more complex.

Those trends are already moving the stock market. The utilities sector has added 23% year to date, putting it 10 percentage points ahead of the S&P 500. Those market-beating returns could continue through 2030 as electricity demand increases, and investors can lean into that once-in-a-decade opportunity by owning shares of the Vanguard Utilities ETF (NYSEMKT: VPU).

Here are the important details.

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The Vanguard Utilities ETF provides exposure to the largest power generators and electric suppliers

The Vanguard Utilities ETF tracks the performance of 69 U.S. utility companies. The index fund is most heavily weighted toward electric utilities, but it also provides exposure to gas, water, and multi-utility companies, as well as independent power producers. The 10 largest holdings are listed by weight below:

1. NextEra Energy: 10.3%
2. Constellation Energy: 6.8%
3. Southern Company: 6.6%
4. Duke Energy: 6.4%
5. Vistra: 4%
6. American Electric Power: 3.9%
7. Sempra Energy: 3.9%
8. Dominion Energy: 3.4%
9. Xcel Energy: 3.1%
10. Exelon: 3%

Nine of the 10 stocks listed above have outperformed the S&P 500 year to date. Sempra is the only company to underperform. But Constellation Energy, Vistra, and American Electric Power have more than compensated with particularly strong returns.

• Constellation Energy is the largest producer of carbon-free energy and the leading competitive retail supplier of power in the U.S. The stock has advanced 81% year to date.
• Vistra is the leading competitive power producer and the second largest competitive retail supplier of power in the U.S. The stock has advanced 53% year to date.
• American Electric Power is one of the largest regulated power producers and it owns the largest electricity transmission network in the U.S. The stock has advanced 29% year to date.

The Vanguard Utilities ETF has an expense ratio of 0.09%, meaning shareholders will pay $9 per year on every $10,000 invested in the fund. The average expense ratio on similar funds is 1.01%, according to Vanguard.

This Vanguard Utilities ETF is best owned alongside other AI stocks and index funds

The Vanguard Utilities ETF achieved a total return of 186% during the last decade, which is equivalent to 11% annually. Comparatively, the S&P 500 achieved a total return of 300% in the last decade, which is equal to 14.8% annually. The same pattern holds over the last five years as well.

While I believe that pattern will reverse and the utilities sector will beat the S&P 500 over the next three to five years, investors with diversified portfolios have a better chance of benefiting from the artificial intelligence (AI) boom. There are plenty of individual AI stocks worth owning, but investors should also consider an S&P 500 index fund.

The S&P 500 includes many of the most influential stocks in the world, and more than half the companies in the index mentioned AI during their last earnings call. Furthermore, the S&P 500 has typically been a profitable investment over long periods, and the index beat most other asset classes during the last decade, including benchmarks for fixed income, international equities, precious metals, and real estate.

Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Constellation Energy, Goldman Sachs Group, and NextEra Energy. The Motley Fool recommends Dominion Energy and Duke Energy. The Motley Fool has a disclosure policy.