During the past year, exchange-traded fund (
) investors have welcomed a plethora of new funds to the
marketplace. These new funds cover everything from municipal bonds
to emerging market financials. But one of the most intriguing of
this latest batch is a fund that covers a hitherto unexplored
What's so exciting about this new fund is that it invests in
companies that develop and implement one of the most important
technologies to come about in a long time. It holds the key to
securing an independent, "green" energy future for the United
States right in the palm of its hand.
Uncle Sam has recognized this technology's potential and, through
generous grants and matching investments from utilities, has
unleashed an $8 billion tidal wave that is washing over the sector.
I'm talking about "smart grid" technology. And if you haven't heard
about this game-changing technology yet, you will.
But first, some background.
The electricity grid refers to the transmission systems that
deliver electricity from power plants to regional substations, and
the distribution equipment that routes the power from substations
to homes and businesses. This outdated infrastructure has been
woefully underfunded during the past half-century -- paltry
investments for maintenance and upgrades haven't kept pace with
steadily rising generating capacity.
In short, we've spent plenty to produce more power to meet the
nation's growing needs, but very little to actually get it from
point 'A' to point 'B'. As a result, the grid has become
overburdened and in desperate need of a major overhaul. Estimates
made by the American Society of Civil Engineers put the price tag
well into the trillions.
For his part, President Obama has made it clear that transitioning
to a smarter, 21st century grid is a top priority. Last October,
the administration pledged $3.4 billion in stimulus grants to help
speed up that modernization. In addition, long overdue expenditures
made by the nation's 3,000 utilities will bring that total closer
to $8 billion.
The goal isn't simply to alleviate congestion and reduce the threat
of blackouts and other power disruptions. A smarter grid will be
well-insulated from potential cyber attacks. It will also be
optimized to make sure power is delivered as efficiently as
possible. In part, that means equipping the system with automated
two-way communication and installing smart home appliances that can
lower energy use during times of peak demand.
The U.S. Department of Energy summarizes these enhancements as
making the power grid more reliable, efficient and secure. Getting
there won't be easy. Yesterday's infrastructure wasn't designed to
carry power from remote wind farms in South Dakota to homes in
Chicago. But ultimately we'll have a responsive, adaptable system
that can adjust the flow of electricity to reduce power consumption
and lower utility bills.
Obviously, this spells tremendous opportunity for the dozens of
companies involved in this nascent field. For many, $8 million
would be a huge influx of cash, let alone $8 billion -- and that's
just a down-payment for the $1.5 trillion that will be needed
during the next decade.
Companies that make intelligent power distribution equipment and
other electrical hardware and devices will be obvious
beneficiaries. But there will also be a need for software, energy
storage, monitoring equipment and other related products.
Take digital smart meters, for example, which will be installed in
more than 40 million homes within the next few years. That rush
will lead to plenty of orders for manufacturers like
Itron (Nasdaq: ITRI)
, which my colleague Andy Obermueller reports just landed a major
CenterPoint Energy (
At $200 per meter, this contract alone could add $44 million to the
firm's bottom line , triple what it earned last quarter. Add it all
up, and it's easy to understand why
General Electric (
believes this one market could generate $12 billion in annual sales
within the next five years.
Virtually every major player with an interest in this high-stakes
game can be found in the new fund's portfolio I mentioned earlier.
FT Nasdaq Clean Edge Smart Grid (Nasdaq: GRID)
ETF . Some of the holdings are conglomerates like GE and
with other lines of business, but I like the fact that 80% of the
fund's assets have been reserved for pure-play specialists like
Action to Take -->
GRID is uniquely positioned to cash in on the wave of funding that
will soon inundate the relatively small smart-grid sector. But
there is enough diversity among the fund's holdings to ensure that
shareholders also have exposure to other sub-sectors of the green
Like any relatively new fund, it has been a bit volatile, so
risk-averse investors need to be cautious. But I think many of its
holdings have powerful catalysts in their favor that could deliver
triple-digit gains during the next few years. I will be monitoring
the fund as a potential addition to the "Sector Trading" Portfolio
newsletter. I suggest you do the same.
Editor: Market Advisor, The ETF Authority
Disclosure: Nathan Slaughter does not own shares of any security
mentioned in this article.
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