Likely to the dismay of clients that were previously enthusiastic about clean technology and renewable energy equities on the back of favorable political setup and the Inflation Reduction Act, those asset classes are faltering. Year-to-date, the widely observed S&P Global Clean Energy Index is down 27.12%.
Further confounding energy investors of all stripes is that despite some rallies by oil prices, the S&P Energy Select Sector Index is lower by 6.36% on the year. At least two things are certain. Neither of those ominous scenarios are guaranteed to repeat in 2024. Both could improve or worsen. Second, energy – fossil fuels and renewables -- rarely qualifies as a “safe” investment.
There’s also significant opportunity here and one of the avenues through which that opportunity can be accessed, potentially with lower risk, is via investments tapping the energy grid. As an investment thesis, the energy grid is garnering more attention for multiple reasons. Those include the need to shore up grids around the world in the name of national security and to meet the needs of increased electric vehicle and renewable energy adoption.
What’s interesting about the grid investment thesis is that it’s underpinned by necessity. That necessity could signal less vulnerability to high interest rates and resiliency not found in other energy segments.
Electricity Demand Signals GRID Opportunity
Obviously, energy grid investing can be considered a tactical concept and for many asset allocators and retail investors, stock-picking to this effect is burdensome. The First Trust NASDAQ® Clean Edge® Smart Grid Infrastructure Index Fund (NASDAQ: GRID) ameliorates that scenario.
GRID, which follows the Nasdaq Clean Edge Smart Grid Infrastructure Index, isn’t a fly-by-night thematic fund. Rather, it turned 14 years old last month and has nearly $764 million in assets under management, confirming some advisors are already aware of the fund’s benefits. As a tactical idea, the ETF is relevant today because global electricity demand is increasing.
“To meet growing demand for electricity and a changing mix of power consumption, utilities are expected to invest heavily in additional capacity,” notes First Trust. “Analysis from Bloomberg suggests that nearly 50 million miles of new power lines may be installed globally by 2050, more than enough to replace the entire global grid today. According to Edison Electric Institute, U.S. utilities may invest over $165 billion annually from 2023-2025, an 80% increase compared to investments made a decade ago (see chart to the right). Similarly, power grid investments in Europe may reach €584 billion by 2030 to achieve their renewable energy targets, according to the European Commission.”
Given the global nature of grid investing, GRID is pertinent because domestic stocks represent just 42% of the portfolio and stocks from at least 10 other countries are found in the ETF.
To GRID for Purity
Another point for advisors to consider is that the population of grid-dedicated ETFs is small. Plus, the other funds with grid exposure typically offer it up in nominal fashion. Those factors highlight the allure of GRID as perhaps the most efficient avenue for accessing its namesake theme.
“GRID is an index-based exchange traded fund comprised of stocks selected for their involvement in grid infrastructure, smart meters, energy management, connected mobility, and related activities,” concludes First Trust. “The underlying index methodology assigns an 80% weight to companies classified as ‘pure plays,’ those that derive more than half of their revenue from gridrelated activities, and 20% to “diversified” stocks, which generate less than half of their revenue from grid-related activities.”