ETFs
Energy will become a major theme of growing demand for the US grid
As the world shifts towards renewable energy, while investing heavily in AI infrastructure that requires a gargantuan amount of energy to operate, certain investment opportunities should be on the radar of long-term investors.
TCW Senior Portfolio Manager Eli Horton Joins Wealth! to provide insight into why electricity and energy ETFs can be a smart play for investors’ portfolios.
“We’re really starting to see the beginning of what we see as a megatheme or transformative investment opportunity in transforming our energy system. If you think about it, we’re at the very beginning of the migration from using all fossil fuels to 100% renewable energy production, and we’re only about 15% of the way there,” Horton confirms to how these ETFs can be an opportunity for investors “Many ambitious targets have been set to achieve net zero emissions by 2050: we will not do it. This is a very complex challenge. The world is investing between $5 and $6 trillion a year to solve this problem.”
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This message was written by Nicolas Jacobino
Video transcription
President Biden today unveils a more than $3 billion investment in a Microsoft data center. But data centers guess why they require a lot of energy, they consume around 1,000 kilowatt hours per square meter. That’s about 10 times the power consumption of a typical U.S. home, according to C&C Technology Group. And as new data centers continue to open to support AI’s generative power and energy , this could be a good ETF play that investors should consider especially thinking about the sector and how it is up over 11% year to date. of the ETF report presented by invest. Joining me now is Eli Horton, who is the senior portfolio manager at TCW. OK. We just presented the chart and looked at the energy and performance this year so far. I mean, is this an area where investors could potentially see continued bullish momentum here? Yeah. Well, thanks for inviting me. It’s good to be here. I think we’re really starting to see the beginning of what we see as a megatheme or transformative investment opportunity in transforming our energy system. Um If you think about it, we’re at the very beginning of we are moving from using all fossil fuels to producing 100% renewable energy and we are only about 15% of the way there. There have been many ambitious targets that will achieve net zero by 2050. We won’t do it. is a very complex challenge. The world invests between $5 and $6 trillion per year to solve this problem. And within this vast system, and it’s very vast, there’s not just energy companies, there’s a, there’s a litany of really energy opportunities. the real-time line that investors should keep in mind, because it’s sort of the central thesis around the energy landscape right now. So look where our focus is, it’s very long term. So certainly over several years in the last year 2023 has been a very informative year for this thesis. So uh there was a big offshore wind farm developer that walked away from two wind farms off the coast of New Jersey, $3 billion that they buried in the ground and those wind farms were deemed no profitable and they abandoned it. Um Hertz sold about a third of its fleet of electric vehicles, why was it too expensive to maintain them? They could not charge the consumer enough due to certain perceptions of autonomy. And so those are two examples of how difficult is this transformation, where does it create opportunity? We think it’s more about brown companies, traditional companies rather than corporations. So think like Exxonmobil, for example, um, not just your typical green company, we’ll invest in both, but we see companies that have kind of been left behind by the market because they’re focused on growth, which are really interesting and very attractive from a valuation point of view. You think about some of the infrastructure and, and even the investments that We were talking about a moment ago about the data center that President Biden visited with Microsoft President Brad Smith. And we’re thinking about how that also leads to this broader kind of correlation between generative AI and energy. I mean, how did you monitor this? So the power and electricity grid is fascinating and it’s a problem that’s going to persist for years to come. And let me give you some context because the AI just kind of lit a match on the dry fire here. Over the past two decades, electricity demand in the United States has remained stable over the next 25 years. Energy consumption will double. But what is the risk? Well, here’s the risk. Our network is already a mess. Think of all the We have brown nuts that we have. Um, I live in California. We have voltage drops all the time. Texas declared a state of emergency on its network last fall. The network therefore already cannot handle the current demand. Now we will double the demand. from the electrification of vehicles and buildings, it’s about bringing manufacturing back here. Um, joining it is from A I. So the demand will increase. How we will solve this problem. We are adding wind and solar power to the grid. It’s awesome. These are intermittent sources, the wind must blow, the sun must shine, so it is less effective. So, to meet a doubling of demand, we need to triple investments in the network. That’s a lot of capital money and the companies that provide solutions to it, uh, would. absolutely benefit from it. And the S ETFs that you’re following right now that seem best able to keep pace with that demand right now, right? So um, there are a few strategies that are very relevant here. The first is called Transform Systems ticker and ETZ Nets um which focuses on this energy transformation. And then the second one is supply chain transformation, which is really focused on bringing manufacturing and reshoring back to the United States, Eli Horton TCW, Senior Portfolio Manager, Eli. see you soon here at the studio. Thank you so much.