Expanding AI trade is turning safety stocks into a 'Texas hedge'
The growing AI trade is infiltrating traditionally safe sectors like utilities, making hedging more difficult.
When a hurricane looms, panic buying clears store shelves of household essentials like water, canned food, dry goods, and toilet paper. A similar dynamic is playing out in the market. Investors are bailing on higher-volatility growth stocks and running toward the shelter of perceived safety sectors like utilities and consumer staples. The key difference? They may not be so safe.
As valuation multiples across capital-intensive AI infrastructure plays, such as specialized data center hosting providers CoreWeave (CRWV) and Iren Ltd (IREN), take on water in the form of massive debt loads due to aggressive capex buildouts, investors may want to take a portion of their equity exposure into more protected water. The issue with utilities is that while it is traditionally considered a conservative sector, more recently it has become part of the AI story as the massive data center build-out is accompanied by surging power demand. This is one of the reasons that in recent years utilities outperformed staples. However, if the bloom of the AI rose helped fuel that outperformance, it would be a “Texas hedge” to buy it now on concerns that the AI trade is getting wobbly. In other words, buying so-called safety stocks might actually increase your risk.
In this context, consumer staples, most easily traded with the Consumer Staples Select Sector SPDR Fund (XLP) is a better choice.
Unlike AI infrastructure, hyperscalers are dependent on enterprise IT budgets and continuous capital infusions. XLP's constituents, led by market heavyweights like Walmart (WMT) , the world’s largest grocery store chain, Costco (COST) , a perennial “Holly Index” constituent, Procter & Gamble (PG) , and toilet paper and diaper maker Kimberly-Clark, generate consistent revenues. I often joke that when the market goes sideways, investors probably need more diapers and toilet paper, not less. Plainly put, consumers buy toothpaste, groceries, and cleaning supplies regardless of macro or micro economic stress.
Consumer staples tend to deliver steady cash flow and XLP distributes a lot of that back to shareholders with a ~2.6% annualized dividend yield. This provides an organic return buffer during market pullbacks, contrasting sharply with high-beta data center operators that re-invest every dollar into equipment and facilities.
Leveraged AI hosts trade at elevated multiples, leaving minimal room for execution errors. Consumer staples offer lower beta (read lower downside in a general equity market pullback).
To capture a structural rotation into staples over a horizon extending into early 2027, a long call diagonal is capital efficient and risk-defined.
Disclosures: Tidal owns/holds all the securities mentioned in the article.
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