Investing in the Smart Grid/Enernet Initiative

Article by Investment U

There are still plenty of opportunities to invest in the developing smart grid or "Enernet" – such as First Trust's GRID ETF.

Remember a couple of years ago when you couldn’t get away from reading about the smart grid or what some others refer to as the Enernet?

Today in the news it’s almost as if production on the first great infrastructure project of the twenty-first century has all but stopped.

But don’t be fooled…

• Spending on the smart grid is still growing at a compound annual rate of 17.4%.
• According to London research firm, Visiongain, the global smart grid market will total $33.91 billion this year. In the next three years, MarketWatch reports that number is projected to exceed $46.5 billion.

There are still plenty of opportunities to take advantage of this enormous energy initiative. You just have to know where to look.

And one of the easiest ways possible is through the First Trust NASDAQ Clean Edge Smart Grid Infrastructure ETF (NASDAQ: GRID).

GRID at a Glance

First Trust’s NASDAQ Smart Grid ETF is designed to seek investment results that correspond with the First Trust NASDAQ Clean Edge Green Energy Index (NYSE: QCLN).

Although similar at first glance, GRID is more specific than QCLN in that it’s designed to track the performance of common stocks in the grid and electric energy infrastructure sector.

Among the fund’s top 10 holdings are:

In all, GRID has 36 holdings. Eighty percent of these are pure plays on the smart grid. Meanwhile, the other 20% are more diversified companies such as ABB. The pure-play components must derive 50% or more of revenue from smart grid, electric infrastructure and other grid-related activities.

But no matter what, all companies must meet a certain criteria in order to be considered for this index. This includes…

• Being classified as a smart grid, electric infrastructure and/or other grid-related activity company according to Clean Edge.
• Have a minimum worldwide market capitalization of $100 million.
• Have a minimum free float of 20%.
• And have a minimum three-month average daily dollar trading volume of $500,000.

So how has the fund performed?

2011 was a rough year for smart grid companies in general. But so far this year, GRID has seen a bit of a rebound, up 13%. And as the smart grid rolls out, GRID has the potential to become a very rewarding high growth fund.

It does have an expense ratio of 0.70%, which is higher than most ETFs, but it still beats the heck out of the average annual fees for mutual funds. Not to mention, trading volume is also fairly thin for the fund, so you may want to consider a limit order when making your purchase.

The Bottom Line

The main advantage of an ETF like GRID is that it can be a pain in the neck trying to handpick smart grid plays that fit and benefit your portfolio. That’s why GRID may be the easiest way possible to diversify and capitalize on the smart grid/Enernet initiative.

Good Investing,

Mike Kapsch

P.S. Investment U’s Energy and Infrastructure Expert, David Fessler, had a few words with NIST’s Deputy Director of Technology Services, George Arnold. Here is the interview:

David Fessler: Dr. Arnold, can you start by telling me a little more about NIST’s role in the development of the Smart Grid standards here in the United States – and why it’s so important?

Dr. Arnold: The Energy Independence and Security Act of 2007 (EISA) has the development of the Smart Grid as a national policy goal. It appointed NIST and gave us the primary responsibility to coordinate standards development. The ultimate goal is to achieve inter-operability of Smart Grid devices and systems across the country.

David Fessler: You mentioned in your opening remarks yesterday that 30 years from now, the Smart Grid will be viewed as the “first great infrastructure project of the 21st century.” How so?

Dr. Arnold: The Smart Grid will fundamentally change how energy is priced, and how we think about and use energy, both at work and at home, and even while we’re driving.

Electricity movement will be more of a dynamic two-way flow as opposed to the static one-way flow we are used to today.

There are currently 130 major Smart Grid projects underway in 45 states. Over 18 million Smart Meters will be installed over the next few years in the United States alone. And that’s just a small part of what the Smart Grid will be.

David Fessler: NIST just announced the release of Version 1.0 of the “Framework and Roadmap for Smart Grid Interoperability Standards.” Can you explain this in layman’s terms?

Dr. Arnold: National and international standards are a critical enabler for the Smart Grid. Without them, you’d have essentially what we have today: 3,100 electric utilities operating alone.

Version 1.0 is the first release of a Smart Grid inter-operability framework, and it contains a roadmap for its further development.

David Fessler: What do you see as the biggest challenge in rolling out the Smart Grid here in the United States?

Dr. Arnold: An educated consumer. In the end, it’s the consumer who’s going to have to pay for the Smart Grid. Unless they see the benefits, they’re not going to spend money on it, or things to connect to it.

Article by Investment U