Utility ETFs are being rethought as growth meets stability

Utilities have always been easy to overlook precisely because they work. The lights turn on, networks stay connected, pipelines move energy where it needs to go. For investors, that reliability translated into a simple role: income, stability and defence  when markets turned.

The same regulated, cash-flow-generating assets that anchored portfolios for decades are now sitting at the centre of a new investment cycle. This is one driven by power demand, digital infrastructure and energy security.

At Harvest ETFs, portfolio manager Mike Dragosits has been focused on what the market may be missing. As part of the team behind the firm’s global utilities income strategies, including the Harvest Utilities Leaders Income ETF (TSX: HUTL) and the Harvest Utilities Leaders Enhanced Income ETF (TSX: HUTE), his view is straightforward: the sector’s foundation has not changed, but the forces acting on it have.

The expansion of cloud computing and artificial intelligence is increasing electricity demand at a pace that existing grid infrastructure was not built to support. Utilities, along with telecom networks and energy pipelines, are now central to a multi-year investment cycle focused on expanding and reinforcing power systems.

“What you think of in utilities is pretty slow growth, one to two percent,” Dragosits says. “Now we’re talking about three, four, even five percent. Some estimates are higher.”

Stability remains the starting point

The underlying case for utilities has not moved. These are essential services that remain in use across economic cycles. Electricity, communications networks and energy transport do not depend on discretionary demand.

“I don’t think it needs to be any more complex than it really is,” Dragosits says. “These are assets people use every day.”

In recent months, that defensive characteristic has reasserted itself as geopolitical risks and rate uncertainty have returned to the foreground.

“By design, we’re focused on North America, so Canada and the U.S., but also Western Europe,” he says. “We concentrate on the largest names by market cap, but they also have to have a high dividend yield.”

The screening process is deliberate. Yield is defined relative to the broader universe, with an emphasis on sustainability rather than headline numbers.

“We define high dividend yield as anything above the 50th percentile,” Dragosits says. “But we exclude the top 10 percent, because that’s where you start to see potential junk yielders with non-sustainable dividends.”

The result is a concentrated group of large-cap companies across utilities, telecom and pipelines that generate consistent income.

Historical patterns reinforce that role. In periods where rate hikes end without a recession, utilities tend to generate positive returns but lag broader equity markets. In more stressed environments, the sector has typically held up better, with smaller drawdowns and, in some cases, flat or slightly positive performance while equities decline.

“You still participate in the upside if things turn out okay,” Dragosits says. “But you’re really protected on the downside if they don’t.”

A new source of demand

What is different today is the addition of a second driver. The buildout of data centres is increasing demand not only for electricity generation, but also for the infrastructure required to deliver it. Natural gas has emerged as a key component of that system, positioning energy pipelines as a direct beneficiary of rising power needs.

“We have that growth kicker,” Dragosits says. “The buildout of artificial intelligence and the energy and data centre needs behind that.”

The impact is visible across subsectors. Utilities are seeing higher expected load growth. Pipelines are benefiting from demand tied to natural gas as a power source. Telecom infrastructure remains tied to the expansion of digital networks.

Regulated returns and dividend income continue to anchor the sector. At the same time, infrastructure demand tied to electrification, energy security and digital expansion is adding a layer of growth that did not exist in prior cycles.

“I think it’s a little bit of both,” Dragosits says. “You’re seeing demand for defensive assets, but you also have the growth of AI and data centres adding on top of that.”

Why geography matters more than expected

The inclusion of Western Europe is not simply about valuation. It is about risk.

Utilities are fixed, capital-intensive assets. That creates exposure not only to economic conditions, but also to regulatory frameworks and environmental factors.

“People tend to think about diversification in terms of sectors,” Dragosits says. “But here you’re also thinking about regulatory risk and geographic risk.”

Concentration in a single market can leave investors exposed to policy changes or localized disruptions. Spreading exposure across jurisdictions reduces that dependence.

“If you’re concentrated in one area, you’re beholden to one regulatory regime,” he says. “By diversifying across Canada, the U.S. and Europe, you’re spreading that risk across different systems.”

That applies at a more granular level as well. In the U.S., regulation varies by state. In Europe, each country operates under its own framework. The result is a more diversified set of outcomes, even within a single sector.

Natural disaster risk is another consideration. Events such as wildfires or severe weather can have localized impacts on infrastructure assets. Geographic diversification helps mitigate that exposure.

“These are large, fixed assets,” Dragosits says. “By diversifying geographically, you’re limiting those risks.”

A sector being valued differently

Infrastructure spending is no longer incremental. The systems that support electricity, connectivity and energy transport are being expanded in ways that were not contemplated even a few years ago.

That does not require aggressive assumptions to matter. Utilities are not being priced for exponential growth, and Dragosits is clear that they should not be. “We’re not building in wild expectations,” he says.

Within Harvest ETFs, that thinking is expressed directly through its global utilities income strategies, including HUTL and HUTE, which combine geographic diversification, subsector balance and active income generation into a single structure.

Infrastructure spending is no longer incremental. The systems that support electricity, connectivity and energy transport are being expanded in ways that were not contemplated even a few years ago.

That does not require aggressive assumptions to matter. Utilities are not being priced for exponential growth, and Dragosits is clear that they should not be. “We’re not building in wild expectations,” he says. “We’re taking a steady business model and adding some growth on top.”

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This article was produced in partnership with Harvest ETFs