First Trust has launched a new thematic equity ETF in Europe providing exposure to the global smart grid infrastructure sector.
Smart grids enable efficient energy management through load balancing, failure recovery, and better distribution oversight.
The First Trust Nasdaq Clean Edge Smart Grid Infrastructure UCITS ETF has been listed on London Stock Exchange in US dollars (GRDU LN) and pound sterling (FGRD LN) as well as on Deutsche Börse Xetra in euros (GRID GY).
Smart grids are innovative electricity networks that combine real-time data collection and analysis with digital communications technology to enable more efficient energy management.
The benefits of smart grids include lower infrastructure costs, reduced carbon emissions, the ability to rapidly respond to outages, self-healing capabilities, a more even distribution of current, and the improved storage and management of renewable energy.
One of the main challenges to smart grids, however, is security as the networks are vulnerable to cyberattacks. Hackers have already infiltrated the US grid on several occasions, while a cyberattack on the Ukrainian power grid in 2015 resulted in an outage that affected hundreds of thousands of people for hours.
Methodology
The fund is linked to the NASDAQ OMX Clean Edge Smart Grid Infrastructure Index which also underlies the US-listed First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID US). GRID launched on Nasdaq in 2009 and currently houses $700 million in assets.
The index selects its constituents from a universe of developed market stocks with market capitalizations above $100m and average daily trading volumes greater than $500,000.
The methodology screens for companies with business activities linked to electric grids, electric meters and devices, energy storage and management systems, and smart grid software. Eligible firms are identified by Clean Edge, a US-based developer of thematic stock indices devoted to the clean energy economy.
Constituents are weighted by float-adjusted market capitalization while setting the combined weight of ‘pure-play’ firms (those deriving more than 50% of their revenue from smart grid activities) at 80% and the combined weight of ‘diversified’ firms (those with significant but less than 50% smart grid revenue exposure) at 20%.
In a bid to enhance diversification, the index also caps the weight of each of the five largest pure-play firms at 8%, the weight of any other pure-play firm at 4%, and the weight of any diversified firm at 2%.
The index is rebalanced quarterly and reconstituted semi-annually.
As of 21 April, US-listed and Ireland-listed stocks each accounted for a quarter of the index weight with the next-largest country exposures being Italy (8.7%), France (8.6%), Switzerland (8.5%), and South Korea (4.5%).
Notable positions included Schneider Electric (8.1%), Johnson Controls International (8.0%), ABB (7.8%), Eaton (7.7%), Aptiv (6.7%), and Quanta Services (4.6%).
The ETF comes with an expense ratio of 0.70%.
Rupert Haddon, Managing Director at First Trust: “We are thrilled to bring this longstanding US strategy to our European clients. With the energy revolution gathering pace, a smarter grid is incredibly relevant to today’s digital energy ecosystem. Growing demand for electricity along with outdated and inefficient infrastructure means the current power grid is unable to keep pace with twenty-first-century technology. For our clients, it represents a less volatile way to gain exposure to the clean energy segment while potentially directly benefitting from future government infrastructure investment.”
Ron Pernick, Managing Director at Clean Edge: “While clean energy technologies such as solar, wind, and electric vehicles get the bulk of media and public attention, it’s the grid that is the great enabler of the energy transition. From next-generation transmission lines and bidirectional grids to distributed and utility-scale energy storage, a modernized grid is required to meet the needs of an always-on, digital, resilient clean-energy economy.”