There’s more than one way to own a piece of the artificial intelligence sector. Skip the vendors of chips and large language models. Invest in the power supply.
Shares of electric utilities under contract with giant data centers are sizzling. The past three years have seen a doubling for Entergy, a quadrupling for Constellation Energy and a sixfold gain for Talen Energy.
Riding this electric wave is Jay Rhame, chief executive of W.H. Reaves & Company, a somewhat obscure money manager in Jersey City, New Jersey, that has an uncommon focus: utilities. Its Virtus Reaves Utilities ETF has, since opening in 2015, raced ahead with a 14.5% annual return, three points ahead of the Morningstar utilities category. A key element of Reaves’ success: anticipating which power producers will benefit from AI electric demand.
Rhame totes up the wins: Entergy is building a custom plant for Meta Platforms in gas-rich, regulation-light rural Louisiana. Constellation has a deal with Microsoft to power computers with a resurrected nuclear plant at Three Mile Island. Talen Energy, a once-bankrupt power producer spun out of Pennsylvania Power & Light, is going to sell output from the Susquehanna nuclear plant to Amazon. The Reaves exchange-traded fund has ridden all three to big gains.
It once was that utility shares had nothing to offer but dividends—large but stagnant. AI changed that. A collection of semiconductors used to make computers smart can easily draw one or two gigawatts of electricity, enough to power a city. “The growth outlook for utilities is probably the best it’s ever been,” Rhame says.
Growth or income: Pick one. The ETF, with a 1.9% distribution that would turn off the average retiree, goes for growth. Income-hungry customers prefer another product, the Reaves Utility Income Fund. This $3.7 billion closed-end is a diversified collection of electric, telecom and energy-adjacent companies with a 5.9% payout.
The closed-end helps pay the bills, but all the spark is in the ETF, which has an undiversified portfolio of 18 electricity vendors. Its outperformance, most of it delivered during the era of hyperscalers, has sent assets up 35-fold in the past three years, to $1.4 billion.
Rhame, 44, had an inside track getting to the top of Reaves. The firm was founded in 1961 by his maternal grandfather. But he owns only a minority stake and thus has to please his colleagues, who are the other holders. They seem to be doing pretty well for themselves. A lean staff of 20 pulls in what looks like $30 million a year in fees.
illustration by patrick welsh FOR FORBES
How To Play It
By William Baldwin
Those power plant stocks are sometimes a little too exciting: They got killed one day last year when pronouncements from DeepSeek threatened the U.S. artificial intelligence industry. If this rollercoaster doesn’t bother you, the actively managed Virtus Reaves Utilities ETF (expense ratio, 0.5%) is one way to get onboard. For lower volatility, buy an index fund. Fidelity, State Street and Vanguard have utility ETFs with assets between $2 billion and $25 billion, expenses below 0.1% and SEC yields double the 1.3% of the Reaves fund. The index funds have smaller doses of pure power producers than Reaves and more money in stodgy integrated utilities like Southern and Duke Energy.
William Baldwin is Forbes’ Investment Strategies columnist.
The ETF has 37% of its money in companies like Talen that generate current, 16% in companies that transport it across the countryside or into meters and 46% in integrated utilities that blend the two activities. This is a hazardous business, exposed as it is to the possibility of a meltdown, an ice storm, a frozen fuel pipeline or a forest fire started by a transmission wire. The biggest risk of all: politics.
If the lights go out or electric bills shoot up, a utility is sure to be blamed, and a public utility commission will dole out punishment at the next rate hearing. Reaves avoids states where cost pressures are severe and controversy surrounds the operation of the grid. “If you never read about the utility in the newspaper, the utility is probably doing well in the stock market,” Rhame says.
Sometimes shareholders get lucky with the politics. Consider Pinnacle West. It supplies electricity in Arizona, where utility commissioners are elected. Usually, candidates do not campaign on a platform to increase monthly bills. For years, the state had a habit of determining next year’s rates by looking at last year’s costs.
Something unusual happened in the election of 2022. There was talk about the need to improve the economy by attracting business. The ETF bought Pinnacle shares. Taiwan Semiconductor announced that it would put $165 billion into Arizona for chip plants that slurp up electricity. Pinnacle is now looking at some decent top-line growth. The stock is up.
Says Rhame: “Often the best absolute move in a utility stock is when it goes from a terrible political environment to just really bad.”
Contrast the Southwest with the Northeast, where politicians condemn cheap natural gas and see in every utility executive a Mr. Burns, the villain in The Simpsons. In 2019 the New York legislature decreed that by 2030 70% of electricity would come from carbon-free sources. The state has gotten only to 44%, the goal having been pushed further out of reach with the politicians’ decision to shut down a nuclear plant prematurely. The planned offshore wind farms, if they ever get built, will cost billions of dollars more than originally expected.
Residents of New York City, who already pay a steep 36 cents per kilowatt-hour, will have reason to get angrier. Consolidated Edison, which supplies them, will be the fall guy. This is a terrible political environment destined to become terribler. Con Ed, a mainstay of index funds, is absent at Reaves.
The Northeast might not see giant Amazon and Meta installations. But it will feel the effects, Rhame says. The surge in demand has pushed up the prices of skilled labor and power plant equipment. The states that are hostile to data centers will miss out on the construction jobs and property tax revenue, but will fully participate in higher operating costs.
On some grids, such as the one serving the mid-Atlantic, “it will only take a few errors to have rolling brownouts or blackouts,” Rhame says. Investors and customers alike should be prepared for a hair-raising ride.
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