Reviewing the New Smart Grid ETF (GRID, PBD, PZD, PBW, QCLN)

If you thought you might not see another green energy or less-dirty energy exchange traded-fund, there is a new ETF for you.  First Trust Advisors is launching the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund of the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (NASDAQ: GRID) today.  So far we are seeing a gain in the ETF by 0.8% to $30.39, but on fairly thin trading volume of about 134,000 shares as of 11:20 AM EST.  We have seen many other green ETFs, but this is actually the first designated ETF or ETN that is geared solely toward the smart-grid rather than just to green energy.  There will be some overlaps in this ETF with others, but that is often the case.

This ETF aims to track equity index called the NASDAQ OMX Clean Edge Smart Grid Infrastructure Index, which is designed to act as a “transparent and liquid benchmark” for the grid and energy infrastructure sector.  The most interesting aspect of this is that it may highlight which individual companies are making leaps and bounds here in the smart grid.  As you might expect, there are many overlaps in here with the other clean or green ETF products via the PowerShares Global Clean Energy (NYSE: PBD), PowerShares Cleantech (NYSE: PZD), PowerShares WilderHill Clean Energy (NYSE: PBW), and the First Trust NASDAQ Clean Edge Green Energy (NASDAQ: QCLN).

The Index is a modified-market cap weighted index and includes companies that are “primarily engaged and involved in electric grid, electric meters and devices, networks, energy storage and management, and industry-related software.”  The index is also jointly owned by the NASDAQ OMX Group,
Inc. (NASDAQ: NDAQ) and Clean Edge, Inc.

There are many overlaps in here as you might expect with electric and clean/green ETF products already on the market.  We have listed notes here on each if they are in the top ten components of other ETFs such as PowerShares Global Clean Energy (NYSE: PBD), PowerShares Cleantech (NYSE: PZD), PowerShares WilderHill Clean Energy (NYSE: PBW), and the First Trust NASDAQ Clean Edge Green Energy (NASDAQ: QCLN).

Some of the components are as follows (and noted if they are in top ten holdings in other clean or green ETFs):

• Advanced Energy Industries (NASDAQ: AEIS)
• American Superconductor (NASDAQ: AMSC) (also in PBW, PBD)
• Comverge Inc. (NASDAQ: COMV)
• Digi International Inc. (NASDAQ: DGII)
• Echelon Corp. (NASDAQ: ELON) (also in PBW)
• EnerNoc Inc. (NASDAQ: ENOC)
• ESCO Technologies Inc. (NYSE: ESE)
• General Cable (NYSE: BGC)
• General Electric Co. (NYSE: GE)
• Intellon Corp. (NASDAQ: ITLN)
• ITC Holdings Corp (NYSE: ITC)
• Itron Inc. (NASDAQ: ITRI) (also in PBW and QCLN)
• Mastec Inc (NYSE: MTZ)
• Pike Electric Corp. (NYSE: PIKE)
• Power-One Inc. (NASDAQ: PWER)
• Quanta Services Inc. (NYSE: PWR)
• Satcon Technology Corp. (NASDAQ: SATC)
• Valmont Industries Inc. (NYSE: VMI)
• WESCO International Inc. (NYSE: WCC)

The larger ADRs listed in the index are as follows:

• ABB Ltd. (NYSE: ABB) ADR (also in PZD)
• Cooper Industries Plc (NYSE: CBE) ADR
• Jinpan Intl Ltd. (NYSE: JST) ADR
• National Grid PLC (NYSE: NGG) ADR
• Siemens AG (NYSE: SI) ADR (also in PZD)
• Telvent GIT SA (NASDAQ: TLVT) ADR

In order to keep companies like GE from being the entire weighting, there is a methodology used to keep the weighting down or in-check.  These have to have smart-grid exposure and traded on an eligible stock exchange.  Pure-play components are given a collective 80% weighting, and the more diversified components not deemed pure-plays are given a 20% total weighting.  The pure-play components must derive 50% or more of revenues from smart grid, electric infrastructure, and other grid related activities.  Companies with a market cap of under $100 million are not eligible and the average daily share trading volume must have averaged $500,000 per day.

What is important to look at is the disclosures and risks associated with all ETF and ETN products so you know exactly what you are investing in…

There is a tracking-risk here which the release noted as “NON-CORRELATION RISK” where the ETF’s return may not match the return of the Index for a number of reasons: operating expenses for the fund not applicable to the index itself, and costs in buying and selling securities.  The ETF will generally not sell a stock because the stock’s issuer is in financial trouble, unless that stock is removed or is anticipated to be removed from the index.  The ETF will also invest in securities of non-U.S. issuers, which can be subject to additional matters of U.S.-traded stocks; and that also brings in a currency risk into play as the Net Asset Value is determined on the basis of U.S. dollars each day.

JON C. OGG
November 18, 2009