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Published: May 28, 2010
During the past year,
exchange-traded fund (ETF) 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 niche.
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 This outdated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 deal with CenterPoint Energy (NYSE:
CNP).
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 (NYSE:
GE) 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. It's the FT Nasdaq Clean Edge Smart Grid (Nasdaq:
GRID) ETF. Some of the holdings are conglomerates like GE
and Siemens (NYSE: SI) 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 iTron.
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 energy movement.
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 for my
ETF Authority newsletter. I
suggest you do the same.
-- Nathan Slaughter
Editor
StreetAuthority Market Advisor
The ETF
Authority |
