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Water utilities are undervalued, while electricity and multi-utilities are moderately overvalued. Virtus Reaves Utilities ETF (UTES) has delivered higher long-term returns than XLU. However, its weaker fundamentals, recent underperformance, and concentration are notable risks.
The Virtus Reaves Utilities ETF (NYSEARCA:UTES) is one of the only actively managed funds in the utilities category, and its 0.49% expense ratio sits near the top end of what utility investors will pay.
Utility stocks returned to focus in 2026 as artificial intelligence data center demand strained the power grid.
Electricity is becoming a stronger economic growth engine, powering AI data centres, EVs, heat pumps and industrial decarbonisation. But grids aren't keeping up.
The Virtus Reaves Utilities ETF is an actively managed fund with strong exposure to regulated utilities and independent power producers. UTES is positioned to benefit from surging electricity demand driven by AI data center growth, supporting a strong long-term growth outlook. Despite a modest 1.5% yield, UTES offers supercharged dividend growth potential and has outperformed passive utilities ETFs in recent years.
Inflation relentlessly erodes purchasing power, making dividend growth essential for income investors to maintain real income. A barbell strategy—combining moderate-yielding dividend growth stocks/ETFs and 6.5%+ yielding investment grade preferreds—offers both growth and current income. AI-driven capex by large-cap S&P 500 firms is powering economic growth and masking weakness among lower-income consumers.
The Virtus Reaves Utilities ETF increased 1.65% in the quarter, underperforming the S&P 500 Utilities Index, though it returned 25.49% over the last 12 months. Entergy and Meta significantly up-sized their existing generation development commitment by 5 gigawatts to support expanding data center development opportunities. Xcel Energy and Google announced a creative 1.9 GW partnership incorporating new renewables and long-duration energy storage to meet growing power demands.
Water utilities appear undervalued by 18% versus historical baselines, while electric/multi utilities are overvalued by 18%, partially offset by quality. Virtus Reaves Utilities ETF offers a compelling active alternative for utilities exposure, outperforming XLU since inception with the risk of a concentrated portfolio. 10 utility stocks were cheaper than their peers in March.