By Ambrose O’Callaghan
Utilities are services, such as lighting, heating, and water. These are provided and paid for by all citizens. The nature of these essential services means they are made available and consumed regardless of the market and economic conditions. So, for the Canadian investors, owning utilities stocks is a good defensive solution for a portfolio. But having the right exposure mix is always the winning solution.
Timing the turn: HUTL delivers price and performance in 2024
In 2024, we presented the thesis that the utilities space offered an opportunity play after a stretch of underperformance in 2022 and 2023.
That thesis was proven correct in 2024. One of the biggest drivers for the utilities sector in the year-over-year period was the peak in the interest rate hiking cycle. Central banks rate hiking did peak in October 2023, which was in line with our expectations. Moreover, we saw a slowdown in the US economy from an overheated pace. That translated into a slowdown in the inflation picture. The expectation was that the easing of the elevated level of overnight rates would return us to a normal upward sloping yield curve, instead of the inverted yield curve we see today. Indeed, the yield curve did normalize in late 2024.
Earlier in 2024, we’d discussed why an easing rate environment was a potential positive for global utilities. The Fed has aimed to stick a soft landing by execution monetary easing going forward. Indeed, it looks to have succeeded in its goal as it approaches its key inflation target of 2% and it has avoided triggering an economic slowdown. Central banks are still navigating through a difficult period and a hard landing is not out of the question.
Historically, Utilities have proven resilient in steeper market sell offs. However, negative returns in absolute terms are unlikely to be avoided. A covered call writing strategy can add cushion to that potential volatility.
What’s the makeup of your exposure to utilities? Having only Canadian utilities, which are dependable and highly profitable, in a portfolio, do not deliver on the benefits that a globally diversified utilities fund can provide. This is why Harvest created the Harvest Equal Weight Global Utilities Income ETF (HUTL: TSX) as a perfect solution to fill the gap. It offers investors exposure to a diversified portfolio of global utilities. HUTL not only delivers growth potential to investors but provides high income, every month, through the application of Harvest’s covered call writing strategy.
The exposure to global utilities sets HUTL apart from its Canadian peers. But what do these global utilities offer, particularly those based in the United States, that gives HUTL the competitive edge as an investment solution in the utilities space?
How the AI revolution is helping to bolster utilities
Last year, we’d discussed why investors may have more artificial intelligence (AI) exposure than they think in their portfolios. Indeed, many of Harvest’s core ETFs offer access to the AI revolution. Fortunately, utilities are well-positioned to benefit. The growth of generative AI, and the explosion of demand for its services, is already laying a new burden on our modern infrastructure. Chat GPT, the sophisticated AI chatbot that was released to the public by Open AI in November 2022, was quickly adopted by huge swaths of t he population for day-to-day tasks. These include generating ideas, composing emails, proofreading content, writing code, the list goes on. With that sophistication comes a greater expenditure of energy. Recent research showed that Chat GPT queries are 6-10 times more power intensive than Google searches. With that surge in power demand, comes a need for updated infrastructure.
Did you know: Chat GPT queries are 6-10 x more power intensive than google searches
Source: Google, SemiAnalysis
Goldman Sachs unveiled a research note in May 2024 that showed AI was set to drive a massive increase in data center power demand. “At present, data centers worldwide consume 1-2% of overall power,” the Goldman Sachs Intelligence report reads. “This percentage will likely rise to 3-4% by the end of the decade.” Efficiency gains made by power centers have waned since the beginning of the decade, while the power consumed by data centers has continued to grow. “By 2028, our analysts expect AI to represent about 19% of data center power demand.”
AI & Data Center Growth to Boost Electricity Demand
Source: Masanet et al. (2020), Cisco, IEA, Goldman Sachs Global Investment Research
HUTL gives investors exposure to US Electric Utilities with names like Avangrid, Dominion Energy, Eversource Energy, FirstEnergy Corp., and others. US electricity demand is poised to erupt in the years ahead. “Between 2022 and 2030, the demand for power will rise roughly 2.4%,” Goldman Sachs Research projects. “Around 0.9 percent points of that figure will be tied to data centers . . . That kind of spike in power demand hasn’t been seen in the US since the early years of the century.”
Data Centers are Concentrated
Data Center Markets
Source: JLL Data Centers 2023 Global Outlook
HUTL: Growth from global utilities and high monthly income
HUTL provides investors access to these powerful trends. It offers exposure to the AI-driven power demand surge from utilities issuer across the globe including US, European, and Asia-based companies. This is one of features that makes it standout from its Canadian peers.
Global Utilities help to diversify a lot of the risks that investors may not initially consider. You have the benefits of the market risk side. A global portfolio helps to diversify away markets that move in different directions at different times. Interest rate risk also diverge in different countries at varying times. Utilities are heavily impacted by interest rates as a yield-sensitive sector.
Natural disaster risk is also mitigated by diversifying out with a geographically diverse portfolio of utilities, as these are large, fixed-in-place real assets.
Moreover, there is regulatory risk diversification. By investing in multiple countries, you have the added benefit of flattening out your concentration in any one political or regulatory regime. Ultimately, you don’t want to put all your eggs in one basket.
In addition to its exposure to that development, HUTL also employs an active covered call writing strategy to support its monthly income distribution.
On June 25, 2024, Harvest ETFs announced an increase to monthly cash distributions for its core ETFs. HUTL now offers a monthly cash distribution of $0.1216 per unit. That represents a current yield of 8.53% as at January 13, 2025.
Annualized Performance
As at January 31, 2025
Ticker | 1M | 3M | 6M | YTD | 1Y | 2Y | 3Y | 4Y | 5Y | 6Y | SI |
---|---|---|---|---|---|---|---|---|---|---|---|
HUTL | 1.50 | 0.45 | 6.07 | 1.50 | 16.87 | 7.45 | 3.83 | 7.16 | 2.65 | 4.96 | 5.21 |
Global utilities enhanced | HUTE
Investors who want even higher levels of income and growth potential may want to consider the Harvest Equal Weight Global Utilities Enhanced Income ETF (HUTE:TSX). This ETF offers exposure to the same portfolio of global utilities and a covered call strategy, while employing modest leverage at approximately 25%. HUTE last paid out a monthly cash distribution of $0.0880 per unit. That represents a current yield of 10.50% as at January 13, 2025.
Annualized Performance
As at January 31, 2025
Disclaimer:
“Commissions, management fees and expenses all may be associated with investing in Harvest Exchange Traded Funds (managed by Harvest Portfolios Group Inc.). Please read the relevant prospectus before investing. The indicated rates of return are the historical annual compounded total returns (except for figures of one year or less, which are simple total returns) including changes in unit value and reinvestment of all distributions and do not consider sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The funds are not guaranteed, their values change frequently, and past performance may not be repeated. Tax investment and all other decisions should be made with guidance from a qualified professional. The content of this article is to inform and educate and therefore should not be taken as investment, tax, or financial advice.”
Certain statements included in this communication constitute forward-looking statements (“FLS”), including, but not limited to, those identified by the expressions “expect”, “intend”, “will” and similar expressions to the extent they relate to the Fund. The FLS are not historical facts but reflect Harvest’s, the Manager of the Fund, current expectations regarding future results or events. These FLS statements are subject to several risks and uncertainties that could cause actual results or events to differ materially from current expectations. Although Harvest, the Manager of the Fund, believes that the assumptions inherent in the FLS are reasonable, FLS are not guarantees of future performance and, accordingly, readers are cautioned not to place undue reliance on such statements due to the inherent uncertainty therein. Harvest, the Manager of the Fund, undertakes no obligation to update publicly or otherwise revise any FLS or information whether because of new information, future events or other such factors which affect this information, except as required by law.