Utilities: The Unexpected AI Infrastructure Trade

Key Points

• Surging AI and data center demand is reshaping the utilities sector from a somewhat defensive yield play into a potential structural growth story.
• Institutional capital is rotating into utility ETFs like XLU and UTES as electricity demand forecasts rise.
• Companies such as Constellation Energy and NextEra Energy are positioned to benefit from baseload power needs and grid expansion tied to AI adoption.

The utilities sector is undergoing a shift in narrative that few investors would have anticipated even two years ago. Traditionally viewed as defensive, income-oriented, and predictable, utilities are now being discussed through a very different lens: growth.

The catalyst is simple but powerful. Artificial intelligence and data center expansion are driving what could become an unprecedented surge in electricity demand over the coming quarters and years. AI models require enormous computational power, which directly translates into rising energy consumption. For a sector that has historically traded on yield and stability rather than significant expansion, this represents a unique inflection point.

From a technical perspective, this theme is not new. It has been building steadily. The most widely followed utility sector ETF, the Utilities Select Sector SPDR Fund NYSEARCA: XLU, is up more than 18% over the past 12 months. More recently, it has gained roughly 10.5% year-to-date, materially outperforming the broader S&P 500.

Institutional flows confirm the shift in sentiment. Over the past year, approximately $6.5 billion has flowed into XLU, compared to about $1.65 billion in outflows. Notably, a significant portion of those inflows occurred during Q4 of 2025, suggesting that large investors are positioning ahead of what they see as a durable structural trend. Price action supports the narrative as well, with the ETF recently breaking above its 52-week high following a bullish consolidation.

This renewed attention comes as Elon Musk has publicly warned of a potential AI-driven power crunch, noting that global development efforts could face electricity constraints as early as late 2026. If that scenario plays out, utilities may become a critical “picks and shovels” layer of the AI ecosystem, similar to how memory and semiconductor names have benefited over the past year.

For investors who agree with that thesis, here are three ways to gain exposure.

UTES ETF: A More Concentrated Utility Play

The Virtus Reaves Utilities ETF NYSEARCA: UTES offers a differentiated approach to sector exposure. Unlike XLU, which tracks a sector index passively, UTES is actively managed.

The fund seeks to outperform by selecting and weighting utility stocks based on fundamentals, growth characteristics, and risk metrics.

Liquidity is lighter than XLU's, with average daily trading volume around 260,000 shares, but investors gain a more concentrated portfolio. The fund currently carries a dividend yield of 1.31% and a net expense ratio of 0.49%.

Its top holdings include Talen Energy NASDAQ: TLN, Vistra NYSE: VST, and Constellation Energy NASDAQ: CEG, which together account for more than 30% of assets.

Constellation Energy: Nuclear Leverage to AI Demand

Constellation Energy is one of the most direct beneficiaries of rising baseload power demand. With a market capitalization of $113 billion, the company operates a diversified generation portfolio, including one of the largest nuclear power plant fleets in the United States.

Nuclear power is particularly relevant in an AI-driven environment. Data centers require reliable, continuous electricity, and nuclear power provides stable baseload generation without the intermittency challenges of some renewable energy sources. As hyperscalers expand AI infrastructure, dependable power becomes critical.

Constellation’s recent results reinforce the momentum. In Q4 2025, the company reported EPS of $2.30, beating consensus estimates, while revenue rose nearly 13% year-over-year to $6.07 billion. Institutional flows have been significant, with billions in net inflows over the past 12 months, underscoring growing conviction.

NextEra Energy: Scale and Infrastructure Advantage

NextEra Energy NYSE: NEE, the largest weighting in XLU, represents scale. With a market capitalization approaching $200 billion, it is one of the largest electric power and infrastructure companies in the United States.

Shares are up approximately 19% year-to-date, outperforming both the broader market and many peers. NextEra operates across regulated utilities and renewable energy infrastructure, supplying power to millions of customers. As electricity demand accelerates, companies with established generation assets and grid infrastructure stand to benefit from higher utilization and favorable pricing dynamics.

Recent analyst upgrades have cited growing confidence in long-term electricity demand, particularly as AI and data center expansion become more visible components of load forecasts.