In a recent market update, Chief Strategist Mike Ko discusses the strong performance of the utilities sector amid a bearish overall market, highlighting the expected growth in electricity demand driven by the rise of electric vehicles and the energy needs of AI data centers. He suggests that investors consider the XLU ETF or options trading strategies, such as diagonal risk reversals, to capitalize on this trend while managing risk.
In the recent market update, the overall sentiment is bearish, with the Nasdaq experiencing a notable decline of half a percent, while the S&P 500 and Dow Jones also show losses. Despite this downturn, the utilities sector has been outperforming the broader market year-to-date, prompting discussions about its attractiveness, especially following a recent rate cut. Mike Ko, Chief Strategist at Open Interest and a CNBC contributor, shares insights on why utilities remain a viable investment option despite their popularity.
Ko highlights the extraordinary performance of utilities since the beginning of last year, noting a total return outperformance of over 7.5%. He emphasizes the historical context of utilities, which have not traditionally been viewed as a growth sector. Currently, utilities are trading at about 19 times forward earnings, which is typically at a discount compared to the overall market. He points out that after a significant increase in electricity demand post-World War II, there was stagnation from 2007 onward, but he anticipates a resurgence in electricity demand growth.
Two primary factors are driving this expected growth in electricity demand: the rise of electric vehicles (EVs) and the increasing energy needs of data centers for artificial intelligence (AI). Ko predicts that by 2030, around 50% of the vehicle fleet will be electric, contributing significantly to electricity consumption. Additionally, the demand from data centers, which are essential for AI operations, is expected to create substantial energy requirements, further propelling the growth of the utilities sector.
Ko also mentions the recent news about Microsoft’s plans to revive a nuclear reactor, which he sees as indicative of the broader trend towards increasing energy generation capabilities. For investors looking to capitalize on the utilities sector, he suggests that the XLU ETF is a straightforward option. However, he acknowledges concerns about chasing the stock after its recent performance and offers alternative strategies for those wary of entering the market at this time.
For those interested in a more strategic approach, Ko recommends considering options trading, specifically buying longer-dated call options due to their relatively low premiums. He suggests a strategy called a diagonal risk reversal, which involves buying call options while simultaneously selling downside puts to hedge against potential losses. This approach allows investors to participate in the potential upside of the utilities sector while managing risk effectively.