There were indications in the market last year that investors were beginning to add exposure to some of the less obvious AI beneficiaries. That’s a trend that’s continuing into 2025 and beyond.
“If you look at what took place in the market last year, I think there were signs that investors, allocators, and advisors were waking up to the reality that other parts of the market — beyond Nvidia, beyond the hyperscalers — are going to benefit from some of the AI investments,” Paul Baiocchi, chief ETF strategist at SS&C ALPS Advisors, said at Exchange.
One example is the rise of utilities stocks. Utilities is a sector within the S&P 500 that typically performs well when the market is down. However, in 2024, it was the best-performing sector for a large part of the year. That was notably during an up year for the market.
This serves as an indication investors are recognizing some utilities companies will be beneficiaries of increasing power demand and electricity consumption, and looking for another way to play the story, Baiocchi said. AI is a contributor to the growth in electricity demand. But the overall electrification of the economy is an even larger opportunity.
Looking at the Alerian Energy Infrastructure ETF (ENFR ) as a measure of diversified energy infrastructure names, the fund was up 42% on a total return basis in 2024. “Sleepy midstream,” said Baiocchi, outperformed the top names by weight in the S&P 500 last year.
“A lot of that has to do with the idea that it’s not just about the hyperscalers, software companies, and SaaS companies at the epicenter of the AI Renaissance. It’s the companies that are being asked to provide the equivalent of the picks and shovels,” he explained.
Why Energy Looks Well-Positioned as an AI Beneficiary
Energy is an interesting play right now, particularly due to opportunities surrounding natural gas.
Currently, around 43% of U.S. electricity is generated by natural gas. However, that number could increase to 50%, per comments by the energy secretary, Baiocchi said.
“The reason is that we’re in the process of undergoing a massive overhaul of energy markets and of our economy in the name of electrification,” he added.
AI data centers are certainly a piece of that. That’s because AI’s contribution to electricity demand is expected to grow from 4% in 2024 to 11% by 2030. However, growing demand for natural gas is also being driven by the implementation of electrification at a high level over the coming decade.
Energy infrastructure companies, which transport natural gas, are well-positioned to support this growing demand, and may be a compelling way to play the natural gas story.
There are challenges with investing directly in natural gas. It can be very volatile. It’s a regional energy source. And it can be a difficult thing to play in the futures market. That’s because of the structure of the curve, Baiocchi said.
Instead, he said the firm has advocated for advisors to consider ENFR and the Alerian MLP ETF (AMLP ).
Using Energy Infrastructure ETFs to Play Natural Gas Demand Growth From AI
ENFR provides exposure to the Alerian Midstream Energy Select Index (AMEI). The index is a composite of North American midstream energy infrastructure companies, including C-corps as well as MLPs. Roughly 70% of the underlying holdings’ revenues comes from operating natural gas infrastructure, according to Baiocchi.
On the other hand, AMLP offers exposure to the Alerian MLP Infrastructure Index (AMZI), a composite of energy infrastructure MLPs.
ENFR and AMLP may help investors play the natural gas story in a more stable, defensive way, according to Baiocchi.
“The reason I say that is because the nature of that business is different from an E&P business, [which tends to be very sensitive to commodity prices],” he noted. “In the case of midstream, it’s a very stable fee-based business model based on volumes.”
Therefore, midstream energy exposure may bring down the volatility of an investor’s energy portfolio. That’s due to the consistency and stability of the midstream business model.
Energy infrastructure has typically had lower volatility than broad energy, allowing investors to increase the yield profile of their energy exposure and potentially set up a better risk/reward profile for their energy allocation, Baiocchi said.
For more news, information, and analysis, visit the Energy Infrastructure Channel.
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