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Utility ETFs in Spotlight as Fed Cuts Rate Amid AI Power Boom
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The Federal Reserve cut its benchmark interest rate by a quarter point on Oct. 29, 2025, marking its second rate reduction this year. The move comes amid a complex economic landscape characterized by a cooler-than-expected inflation on one hand and a weakening labor market on the other, further complicated by the recent government shutdown that has limited the economic data available to policymakers.
While Fed Chair Jerome Powell indicated that a further cut in December is "not a foregone conclusion," the current easing of monetary policy should place the Utility sector at the center stage as investors reassess portfolio allocations in the wake of the cut.
As utilities stand to benefit from lower borrowing costs, the current policy tailwind, combined with rising electricity demand from Artificial Intelligence (AI)-driven data center growth, puts the immediate spotlight on Utility Exchange-Traded Funds (ETFs).
How Could Utilities Benefit From Rate Cuts?
Utility companies are uniquely positioned to capitalize on a declining interest rate environment due to their capital-intensive operations. These firms require substantial upfront investment to build, maintain, and modernize infrastructure — from power plants and transmission lines to grid modernization projects. Such projects are often financed by taking on substantial debt.
A Fed rate cut directly translates to a lower interest expense burden on their bottom line, improving profitability. More importantly, it makes it significantly easier and cheaper for them to borrow more money.
The financial relief with the latest Fed rate cut has arrived at a critical juncture, as the rise of AI is fundamentally reshaping the energy landscape. The proliferation of power-hungry data centers is driving unprecedented electricity demand. To this end, Goldman Sachs Research firm projects that global power demand from data centers could increase by as much as 165% by the end of this decade.
So, one can imagine the billions of dollars in capital expenditures required to build a robust and resilient utility infrastructure capable of supporting this massive power generation and its efficient transmission. A low-interest-rate environment thus makes the substantial necessary investments in grid capacity, renewable energy integration, and resilience upgrades significantly more feasible and cost-effective for utility providers.
The Case for Choosing Utility ETFs Over Individual Stocks
For investors seeking exposure to the utility sector's potential, ETFs present a compelling strategy compared to selecting individual stocks.
While individual utility stocks may offer compelling stories, an investor focused on the long-term benefits of this trend should consider Utility ETFs. This is because an ETF, which holds a basket of stocks across the utility sector, offers diversification that helps investors ride out the idiosyncratic risk of any single company.
If one utility stock falters due to a localized regulatory setback or an operational issue, the broad performance of the entire sector within the ETF mitigates that risk. This provides a more stable, income-focused exposure to the defensive, high-capital-expenditure nature of the utilities sector as it enters this new era of lower borrowing costs and surging AI-related demand.
Moreover, many utility ETFs are passively managed and track established utility indices, resulting in low expense ratios. This makes them a cost-efficient way to gain broad exposure to the sector's trends without the need for constant monitoring of individual companies.
Utility ETFs in Spotlight Amid a Low-Rate Environment
The following utility ETFs offer a straightforward way for an investor to benefit from the convergence of lower interest rates and rising power demand:
Utilities Select Sector SPDR Fund ((XLU - Free Report) )
This fund offers exposure to 31 companies from electric utilities; water utilities; multi-utilities; independent power and renewable electricity producers; and gas utilities industries. It holds assets under management (AUM) worth $22.76 billion and has a net asset value (NAV) of $90.10.
XLU has gained 21.6% year to date. The fund charges 8 basis points (bps) as fees.
This fund offers exposure to electric, gas, and water utility companies as well as companies that operate as independent producers and/or distributors of power. It has 69 companies in its holding. The fund holds total net assets worth $9.6 billion and has a NAV of $195.24.
VPU has surged 22.1% year to date. The fund charges 9 bps as fees.
This fund provides exposure to 44 U.S. companies that supply electricity, gas, and water. It holds net assets worth $1.52 billion and has a NAV of $112.95.
IDU has soared 19.3% year to date. The fund charges 38 bps as fees.
Image: Bigstock
Utility ETFs in Spotlight as Fed Cuts Rate Amid AI Power Boom
The Federal Reserve cut its benchmark interest rate by a quarter point on Oct. 29, 2025, marking its second rate reduction this year. The move comes amid a complex economic landscape characterized by a cooler-than-expected inflation on one hand and a weakening labor market on the other, further complicated by the recent government shutdown that has limited the economic data available to policymakers.
While Fed Chair Jerome Powell indicated that a further cut in December is "not a foregone conclusion," the current easing of monetary policy should place the Utility sector at the center stage as investors reassess portfolio allocations in the wake of the cut.
As utilities stand to benefit from lower borrowing costs, the current policy tailwind, combined with rising electricity demand from Artificial Intelligence (AI)-driven data center growth, puts the immediate spotlight on Utility Exchange-Traded Funds (ETFs).
How Could Utilities Benefit From Rate Cuts?
Utility companies are uniquely positioned to capitalize on a declining interest rate environment due to their capital-intensive operations. These firms require substantial upfront investment to build, maintain, and modernize infrastructure — from power plants and transmission lines to grid modernization projects. Such projects are often financed by taking on substantial debt.
A Fed rate cut directly translates to a lower interest expense burden on their bottom line, improving profitability. More importantly, it makes it significantly easier and cheaper for them to borrow more money.
The financial relief with the latest Fed rate cut has arrived at a critical juncture, as the rise of AI is fundamentally reshaping the energy landscape. The proliferation of power-hungry data centers is driving unprecedented electricity demand. To this end, Goldman Sachs Research firm projects that global power demand from data centers could increase by as much as 165% by the end of this decade.
So, one can imagine the billions of dollars in capital expenditures required to build a robust and resilient utility infrastructure capable of supporting this massive power generation and its efficient transmission. A low-interest-rate environment thus makes the substantial necessary investments in grid capacity, renewable energy integration, and resilience upgrades significantly more feasible and cost-effective for utility providers.
The Case for Choosing Utility ETFs Over Individual Stocks
For investors seeking exposure to the utility sector's potential, ETFs present a compelling strategy compared to selecting individual stocks.
While individual utility stocks may offer compelling stories, an investor focused on the long-term benefits of this trend should consider Utility ETFs. This is because an ETF, which holds a basket of stocks across the utility sector, offers diversification that helps investors ride out the idiosyncratic risk of any single company.
If one utility stock falters due to a localized regulatory setback or an operational issue, the broad performance of the entire sector within the ETF mitigates that risk. This provides a more stable, income-focused exposure to the defensive, high-capital-expenditure nature of the utilities sector as it enters this new era of lower borrowing costs and surging AI-related demand.
Moreover, many utility ETFs are passively managed and track established utility indices, resulting in low expense ratios. This makes them a cost-efficient way to gain broad exposure to the sector's trends without the need for constant monitoring of individual companies.
Utility ETFs in Spotlight Amid a Low-Rate Environment
The following utility ETFs offer a straightforward way for an investor to benefit from the convergence of lower interest rates and rising power demand:
Utilities Select Sector SPDR Fund ((XLU - Free Report) )
This fund offers exposure to 31 companies from electric utilities; water utilities; multi-utilities; independent power and renewable electricity producers; and gas utilities industries. It holds assets under management (AUM) worth $22.76 billion and has a net asset value (NAV) of $90.10.
XLU has gained 21.6% year to date. The fund charges 8 basis points (bps) as fees.
Vanguard Utilities ETF ((VPU - Free Report) )
This fund offers exposure to electric, gas, and water utility companies as well as companies that operate as independent producers and/or distributors of power. It has 69 companies in its holding. The fund holds total net assets worth $9.6 billion and has a NAV of $195.24.
VPU has surged 22.1% year to date. The fund charges 9 bps as fees.
iShares U.S. Utilities ETF ((IDU - Free Report) )
This fund provides exposure to 44 U.S. companies that supply electricity, gas, and water. It holds net assets worth $1.52 billion and has a NAV of $112.95.
IDU has soared 19.3% year to date. The fund charges 38 bps as fees.
Fidelity MSCI Utilities Index ETF ((FUTY - Free Report) )
This fund offers exposure to 66 U.S. utility companies. It holds net assets worth $2.06 billion and has a NAV of $58.20.
FUTY has soared 21.9% year to date. The fund charges 8 bps as fees.