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The utilities sector has emerged as a leading performer in the stock market the past couple months amid signs of rotation away from the previously dominant technology sector. The outperformance of utilities is historically seen as evidence of investors seeking safe havens.
However, a deeper look into the factors driving this trend reveals a surprising catalyst: the increasing integration of artificial intelligence (AI) and the consequent rise in electricity demand from data centers. In other words, some utilities stocks are emerging as the next trade on AI.
Below is a daily chart of the Utilities Select Sector Index* as of May 31, 2024.
Source: StockCharts.com, May 31, 2024.
Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.
The performance data quoted represents past performance. Past performance does not guarantee future results.
A Safe Haven or Something More?
Traditionally, investors gravitate to utilities when seeking stability and dividends, or when positioning for lower interest rates. This conventional wisdom seemed to explain the recent rotation away from tech, especially amid economic uncertainties and fluctuating interest rates.
However, the narrative is evolving. The Wall Street Journal recently highlighted a significant, yet underappreciated, factor behind the utilities sector's resurgence: the growing electricity needs driven by AI advancements and the expansion of data centers. As AI technologies proliferate, the demand for computational power—and thus electricity—is expected to soar, positioning utilities at the forefront of this technological revolution.
AI's Growing Appetite for Power
The rise of AI and big data has led to a boom in data center construction. These centers, essential for AI processing and data storage, consume vast amounts of electricity. Goldman Sachs Research estimates that data center power demand will grow 160% by 2030.
Companies like Alphabet (Ticker: GOOGL), Amazon (Ticker: AMZN), and Microsoft (Ticker: MSFT) are continually expanding their data center footprints to support their AI capabilities and cloud services. This expansion drives a corresponding increase in electricity consumption, benefiting utility companies that supply this power.
Some of the recent highflyers in the utilities sector include Vistra Corp (Ticker: VST) and Constellation Energy Group (Ticker: CEG), which are both in the Utilities Select Sector Index. Both stocks have experienced significant gains, propelled by their strategic positioning to meet the growing power demands of data centers. Vistra, for instance, has diversified its portfolio to include renewable energy sources, aligning with the sustainability goals of major tech firms. Similarly, Constellation Energy has leveraged its nuclear and renewable energy assets to cater to the needs of high-energy-consuming data centers.
A Leveraged Bullish Bet on Utilities
Although the utilities sector has been on a strong run recently, they have lagged technology and AI plays for several years now. If this theme has staying power, short-term traders may continue to seek gains on the long side.
Direxion’s Daily Utilities Bull 3X Shares (Ticker: UTSL) seeks daily investment results, before fees and expenses, of 300% of the performance of the Utilities Select Sector Index. If the recent strength in utilities is more than just a flight to safety or search for dividends, UTSL is one way to play the trend.
To view the Fund's full holdings, click here. Holdings are subject to risk and change.
*Definitions and Index Descriptions
An investor should carefully consider the Fund’s investment objective, risks, charges, and expenses before investing. The Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain the Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at direxion.com. The Fund’s prospectus and summary prospectus should be read carefully before investing.
Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.
The Utilities Select Sector Index (IXUTR) is provided by S&P Dow Jones Indices and includes domestic companies from the utilities sector which includes the following industries: electric utilities; multi-utilities; water utilities; independent power producers and energy trades; and gas utilities.
One cannot directly invest in an index.
The “Utilities Select Sector Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty Asset Management, LLC (“Rafferty”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Utilities Select Sector Index.
Direxion Shares Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Daily Index Correlation Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Passive Investment and Index Performance Risk, and risks specific to the securities of the utilities sector. Utility companies are affected by supply and demand, operating costs, government regulation, environmental factors, liabilities for environmental damage and general liabilities, and rate caps or rate changes. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.