Vanguard Utilities Index ETF: Are Utilities the New Growth Stocks?

Electric utilities used to be known as "widows and orphans" stocks because they were considered safe and paid large dividends. Today, however, they are increasingly looking like growth stocks due to the world's push toward electrification. While the utility sector will likely never rival the growth of the technology sector, utilities aren't the boring stocks of old, either. Here's why Vanguard Utilities ETF (NYSEMKT: VPU) could provide you with shockingly attractive returns.

What's changed in the utility sector?

Regulated utilities are granted monopolies in the regions they serve. In exchange, they have to submit to material government oversight of the rates they charge and the capital investments they make. Essentially, regulators try to strike a balance between reliability, cost, and investor returns. Traditionally, that has meant slow, steady growth for utilities.

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But something has changed. Between 2000 and 2020, electricity demand grew by 9%. Not 9% a year, 9% over the entire 20-year span. Between 2020 and 2040, however, demand is projected to increase as much as 55%. That's a step change in demand driven power hungry technologies like electric vehicles and artificial intelligence. To keep up with demand, utilities will have to increase capital spending. And regulators are likely to approve of that spending along with regular rate hikes to ensure grid reliability. A lot of companies are also contracting directly with utilities for power, as well.

Vanguard Utilities ETF is a good way to take advantage of the change

You could try picking individual utilities to play this step change in electricity demand. However, that approach is time-consuming and entails material idiosyncratic risk. Most investors will be better off simply buying a diversified ETF, such as Vanguard Utilities ETF. The expense ratio is a tiny 0.09%, and roughly 62% of the portfolio is dedicated to electric utilities. However, another 30% is spread across multi-utilities, renewable power providers, and independent power producers, all of which have an electrical component.

Essentially, Vanguard Utilities ETF is a simple way to quickly get broad exposure to the utility sector. And that, in turn, allows you to participate in the rising demand for electricity. However, remember that this demand isn't a one or two-year phenomenon. It is expected to be a multi-decade trend. If you buy Vanguard Utilities ETF, go in with a long-term mindset. The exchange-traded fund's attractive 2.5% dividend yield should make it easier for you to stick around through any short-term drawdowns along the way.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.