ETFs: Energy to become mega theme on rising US grid demands

As the world moves towards renewable energy, simultaneously making massive investments in AI infrastructure which demands a gargantuan amount of power to run, certain investment opportunities should be on the radar for investors for the long term.

TCW Senior Portfolio Manager Eli Horton joins Wealth! to give insight into why power and energy ETFs may be a smart play for investor portfolios.

"We are really starting to see the beginning of what we consider a mega theme or a transformative investment opportunity in the transformation of our energy system. If you think about it, we are in the very early innings of migrating from using all fossil fuels to 100% renewable power generation, and we are only about 15% of the way there," Horton cements how much of an opportunity these ETFs may be for investors. "There's been a lot of lofty targets that we'll make it by 2050 to a net zero state: We won't. This is a very complex challenge. The world's investing $5 to 6 trillion per year to solve this problem."

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This post was written by Nicholas Jacobino

Videoprotokoll

President Biden unveiling an over $3 billion investment in a Microsoft data center today.But data centers guess what they require a lot of energy, they consume about 1000 kilowatt hours per square meter.That's about 10 times the power consumption of a typical American home according to C and C tech group.And as new data centers continue to open up to support generative A I power and energy might be a good ETF play for investors to consider especially thinking about the sector and how it's up over 11% year to date as part of the ETF report brought to you by invest.Joining me now we've got Eli Horton who is the TCW senior portfolio manager here.OK. We just laid out the chart and looking at energy and the performance over this year so far.I mean, is this an area where investors could potentially see some continued upside momentum here?Yeah.Well, thanks for having me.It's good to be here.I think we are really starting to see the beginning of what we consider a mega theme or a transformative investment opportunity in the transformation of our energy system.Um If you, if you think about it, we are in the very early innings of migrating from using all fossil fuels to 100% renewable power generation and we are only about 15% of the way there.There's been a lot of lofty targets that will make it by 2050 to a net zero state.We won't.Uh this is a very complex challenge.The world's investing 5 to $6 trillion per year to solve this problem.And within this broad system and it's very broad, it's not just energy companies, there's a, there's a litany of really energy opportunities.What is the real time line then that investors should be keeping in mind as, as kind of the core thesis around the energy landscape right now.So, so look where we uh where we focus is is very long term.So certainly multi year in nature last year 2023 was a very informative year for uh this thesis.So uh there was a large developer of offshore wind farms that walked away from two wind farms off the coast of New Jersey, $3 billion that they sunk into the ground and these wind farms were deemed uneconomic and they walked away from it.Um Hertz sold about a third of its ev fleet, why it was too expensive to maintain them?They couldn't charge enough to the consumer because of some range perceptions.And so those are two examples of how difficult this transformation is where does it create the opportunity?We think it's more in the brown businesses, the legacy companies rather businesses.So, so think like uh Exxonmobil, for example, um not just your classic green company, we'll invest in both, but we are seeing businesses that have sort of been left behind by the market as they focus on growth um that are really interesting and a very attractive from valuation perspective.You think about some of the infrastructure and, and even the investments that we we're talking about a moment ago with the data center that President Biden visited with Microsoft's President Brad Smith.Um And we think about where that also leads into this broader kind of correlation between generative A I and energy.I mean, how have you been monitoring that?So the power and electrical grid is fascinating and it is a problem that is going to persist for years.And let me give you some context because A I has just kind of lit a match on the dry kindle in here.So the past two decades, power demand in the US has been dead flat over the next 25 years.Power consumption is going to double.What's the risk to that though?Well, here's the risk.Our grid is already a mess.Think about all the brown nuts that we have.Uh I live in California.We have brownouts all the time Texas declared a state of emergency in its grid last fall.So the grid already cannot handle the current demand.Now, we are going to double demand.It's from electrifying vehicles, buildings, it's from bringing manufacturing back here.Um Rejoining it's from A I.So demand is going to grow.How we're going to solve that.We're adding wind and solar to the grid.That's great.Those are intermittent sources, wind has to blow sun has to shine, so it's less efficient.So to meet a doubling of demand, we need to triple grid investment.That's a lot of capital dollars and the businesses that are providing solutions there uh would absolutely benefit.And the ETF S that you're tracking right now that seem most apt to keep pace with this demand right now, right?So uh there's a, there's a couple of strategies that are very relevant here.The first is called transform systems ticker and ETZ Nets um that focuses on this energy transformation.And then the second is transform supply chain tick up supp, which really focuses on bringing manufacturing and reshoring back to the US, Eli Horton TCW, senior portfolio manager, Eli.Great to see you here in the studio.Thanks so much.