The artificial intelligence boom is creating unexpected investment opportunities, steering attention away from chipmakers and large language model developers toward the essential power suppliers. Electric utility stocks that have secured contracts with massive data centers are experiencing significant growth.

Utility Stocks Ride the AI Electricity Wave

The performance of certain utilities has been remarkable over the last three years. Entergy shares have doubled, Constellation Energy has quadrupled, and Talen Energy has seen a sixfold increase. This surge is directly linked to the immense power requirements of AI infrastructure.

The Reaves Strategy: Betting on Power Demand

Jay Rhame, CEO of W.H. Reaves & Company, a specialized money manager in Jersey City, New Jersey, has successfully anticipated which power producers will benefit most from AI electricity demand. His firm focuses exclusively on utilities.

The Virtus Reaves Utilities ETF, launched in 2015, has significantly outperformed its category, achieving a 14.5% average annual return since inception. This is approximately three points higher than the Morningstar utilities category average.

Rhame points to specific examples driving this success. Entergy is constructing a dedicated plant for Meta Platforms in regulation-light, gas-rich rural Louisiana. Constellation Energy has a deal with Microsoft to power computers using the resurrected nuclear facility at Three Mile Island.

Furthermore, Talen Energy, a producer that emerged from bankruptcy after being spun out of Pennsylvania Power & Light, will supply power from the Susquehanna nuclear plant to Amazon. The Reaves ETF has benefited substantially from holding all three of these companies.

The Shift from Income to Growth

Historically, utility shares offered only large but stagnant dividends, appealing primarily to income investors. Artificial intelligence has fundamentally changed this dynamic.

A cluster of semiconductors required for advanced computing can consume between one and two gigawatts of electricity—enough to power an entire city. Rhame asserts, “The growth outlook for utilities is probably the best it’s ever been.”

Divergent Investment Approaches

Investors must choose between growth and income when considering utility exposure. The Reaves ETF targets growth, offering a modest 1.9% distribution yield that may not suit retirees.

For income-focused investors, Reaves offers the Reaves Utility Income Fund, a $3.7 billion closed-end fund. This fund provides a higher 5.9% payout by diversifying across electric, telecom, and energy-adjacent companies.

While the closed-end fund provides income, the growth engine is the actively managed ETF. Its undiversified portfolio of 18 electricity vendors has seen assets swell 35-fold in three years to $1.4 billion, driven by hyper-scaler demand.

Navigating Risks in the Utility Sector

Investing in power plant stocks can be volatile. Last year, pronouncements from DeepSeek briefly threatened the U.S. AI industry, causing sharp drops in related stocks. Investors uncomfortable with this rollercoaster should consider lower-volatility index funds.

Major providers like Fidelity, State Street, and Vanguard offer utility ETFs with assets ranging from $2 billion to $25 billion. These index funds have lower expenses (under 0.1%) and higher yields than the Reaves fund, but they hold smaller allocations to pure power generators.

The Reaves ETF portfolio is structured with 37% in power generators, 16% in transmission/distribution companies, and 46% in integrated utilities. This sector faces inherent hazards, including weather events, equipment failure, or transmission line-related fires.

The Biggest Risk: Political Scrutiny

The most significant risk for utilities remains political interference. When outages occur or bills rise, utilities are often blamed, leading to punitive actions during rate hearings by public utility commissions.

Reaves actively avoids states facing severe cost pressures or grid operation controversies. Rhame notes, “If you never read about the utility in the newspaper, the utility is probably doing well in the stock market.”

Sometimes, political environments unexpectedly favor utilities. Pinnacle West, which operates in Arizona where commissioners are elected, benefited from a shift toward attracting business. The announcement of Taiwan Semiconductor's $165 billion investment in Arizona chip plants promises significant top-line growth for Pinnacle.

Rhame summarized this political luck: “Often the best absolute move in a utility stock is when it goes from a terrible political environment to just really bad.”

Contrasting Political Environments

The Northeast presents a stark contrast. New York State mandated 70% carbon-free electricity by 2030, but currently lags at 44%, partly due to the premature shutdown of a nuclear plant.

Planned offshore wind projects face massive cost overruns, which will likely anger New York City residents already paying 36 cents per kilowatt-hour. Consolidated Edison, a common index fund holding, is expected to bear the brunt of this political fallout and is notably absent from Reaves' portfolio.

Rhame suggests that even states hostile to data centers will feel the economic pressure. The surge in AI demand inflates costs for skilled labor and power plant equipment nationwide. While these states miss out on local tax revenue, they still face higher operating expenses. Rhame warns that on some grids, like the mid-Atlantic, “it will only take a few errors to have rolling brownouts or blackouts,” advising that investors and customers should prepare for instability.