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A
Today's Animal Spirits Talk youk Book is brought to you by First Trust. Go to ftportfolios.com to learn more about the First Trust NASDAQ Clean Energy Smart Grid Infrastructure ETF that's ticker grid. Great Ticker. G R I D. That's ftportfolios.com to learn more.
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B
Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.
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A
Welcome to Animal Spirits with Michael and Ben. Michael, you and I have been talking in recent weeks about the somewhat surprising winners and losers from the AI trademark. I don't know that anyone really assumes that utilities are like this fast growing up and coming innovative sector. This would be one of the ones to me that I would have never figured out when it first started the whole AI boom, that utilities would go crazy and the build up for the power would be kind of a ceiling on this whole thing.
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C
Hey, I thought you were a picks and shovels guy. Is this not part of the picks and the shovels?
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A
That is picks and shovels. If I was on cnbc, that's what I would say. Yes, true.
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C
That's what you want to own the
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A
picks and the shovel. And this is it. And it is interesting because if you just there was a Robert De Niro movie, I don't know, seven years ago or something, and he was a guy who built the power lines, right?
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D
And if you go, whoa, whoa, what was this movie?
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A
I can't remember.
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C
Bobby D built Tower Lines.
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A
I mean, he's done a lot of paycheck movies. It was just okay. But if you go in any neighborhood, anywhere in the country and you see power lines everywhere, you kind of think to yourself, how old are these? Right? They look like they've been here forever. Why aren't they underground or something? And it sounds like the whole AI build out has made many people realize that we need to update this grid. See what I did there?
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C
So Ben, I asked Claude what movie you're talking about, and Claude said, I think the movie you're picturing is Life on the Line.
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A
That's it. I think Sam Rockwell may be in
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C
it, but the star is John Travolta. Not De Niro.
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A
No, no, no. Tell Claude they're wrong.
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C
I searched De Niro's filmography, and there's no Power Line movie in it, so it's almost certainly travolta.
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A
Everybody's fine. 2009 movie.
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C
Okay, you know what? Oh, yeah. What about Everybody's Fine?
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A
Drew Barrymore, Sam Rockwell, Kate Beckinsale, and Robert De Niro?
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C
I never heard of it. Let's see what Claude has to say for itself. All right, anyway, what were you saying?
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A
Anyway, on today's show, we talked to Ryan Isakanen. Ryan is a senior vice president, ETF strategist at First Trust. And they have a ETF that. That is trying to take advantage of. Not, I guess, not trying to take advantage. It was there well before the AI Boom happened to build out the power grid because they. They thought there was necessary to see a big boom in the power grid or a big upgrade in the power grid. And you. You've got some numbers on this. This. This fund is growing or has grown like crazy because of AI but that was never the point because the fund has been around for a very long time. So what did it grow to? It's a $12 billion fund now, just about, anyway. And it's a lot of companies you've never heard of. Some you have, but it's. It's a very interesting thought experiment. You talk about what Taiwan Semiconductor being the. The transistor. The governor does hold back AI Maybe it also is the electrification of the country for building out the data centers. Anyway, fascinating conversation today with Ryan from First Trust. So here is our talk with Ryan Isakanin from First Trust.
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C
Ryan, welcome to the show.
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D
Hey, thanks for having me, guys.
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C
All right, so we're talking today about the First Trust NASDAQ Clean Energy Smart Grid Infrastructure Fund. The ticker is grid. Great ticker. This thing has been around for. So, all right, I looked on. I went on the wide charts, as I do, and I go to the fund, and I see what's going on. Whoa, $12 billion. Holy cow. This is not a new fund. It's been around for a while. The objective has not changed. The narrative has changed a little bit in terms of getting the market excited. And I say excited because there's $12 billion in the fund, and in 2023, there was a billion dollars. So a lot of the interest has come over the last. Let's say since 2025, the AUM has. Sex. Toppled 6. Toppled. It's up 6x. I don't know if I said that properly. But anyway, what's the story with grid? Why. Why all of the interest from investors? I know this is a softball question, but here we go. First one.
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D
Well, I think it's one of those adjacent themes alongside the build out of AI and that's what a lot of investors have focused on recently. It's really when we think about where the bottlenecks are and you know, what, what AI to not be deployed as quickly as many people might want it to be. It's the, the demand for power. And of course you have to connect new sources of demand with sources of generation and that requires the power grid. And so our fund is all about modernizing and expanding power grids. And as, as you mentioned, it's been around since 2009. So it's not a, a new story that we've needed to modernize the power grid. Some of the drivers, some of the reasons for that have shifted. When we first launched the fund back in 2009, the narrative surrounding why you needed to modernize the power grid had a lot more to do with new sources of power generation coming online. Whether it was wind or solar. The existing power grid infrastructure just didn't work well. It was designed, you know, 100 years ago for centralized power generation and everything flew or flowed downstream from coal fired plants. Now you're introducing intermittent source of power generation that came and went as the sun set in the evening or the wind stopped blowing. And so you had to figure out how to introduce a new power grid essentially for that. And of course that's still related. There's still a lot of wind and solar that comes online. But this new source of demand coming from AI has really been a huge driver in the need to really expand and modernize that grid. And so the methodology hasn't changed, the objective hasn't changed, but the driver has really accelerated over the last few years.
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A
What, at what point did you realize like, oh, this our fund is an AI play? Like, what was that aha moment for you? Like, okay, this is, this is something new now.
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D
Three years ago, my team published a piece where, you know, we had kind of recognized that it was something that was going to create a huge amount of demand and therefore pricing power. When you think about how quickly demand has come on for, for more electricity, you know, when we obviously didn't know that you were going to have AI in 2022, you know, November 2022, you sitting around the Thanksgiving table with your family and trying to figure out what chat GPT was, you know, we had no idea the grid Operators had no idea. They thought that we'd have, you know, just that, that under a 1% increase in power demand year over year that we'd had over the last couple decades. It was really, you know, 23, 24, as those estimates started to get ratcheted higher, that we recognized that, you know, this is something where you're going to have massive amounts of demand if this continues. And it's only accelerated since then. So it's really been over the last, you know, I'd say two or three years that we've recognized that this was one of those adjacent plays to the build out of AI.
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C
Ben and I have been talking a lot about the bottlenecks at every, every stop of the supply chain, which is a natural governor on how fast these things can be produced, which I guess theoretically should, should hopefully like keep some of these things from going completely out of control. In other words, if demand was able to meet, if supply was able to meet demand, then maybe you would say, all right, then now there's an oversupply and everything comes crashing down. So I think this is like a natural governor in a good way and the way that we've been framed that a lot is like, all right, Taiwan semi, they can only generate so many chips per minute, per hour, per day. We haven't spent a lot of time talking about the, the power aspect of this. I'm so ignorant to how all of this works. For a layman, what do some of the capacity constraints to powering these data centers literally look like?
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D
I think unlike some of what you might think of with other forms of bottlenecks, you know, one of the differences when it comes to the power grid and the build out of the power grid has to do with the reality that this, this is all, you know, you build power lines, it goes through somebody's yard, it goes through somebody's, somebody's business. There's a lot of regulation that is required that is just unavoidable. And so that's part of the reason why you start to hear these large technology companies introducing behind the meter and some of these other forms of power generation. But, but I think there is still a massive amount of, of actual length to the power grid that you're going to have to add to not just the US but also Europe, also Asia, also the developing world. And you know, it's a massive, massive amount of infrastructure that has to be built. And this is, this is an industrial project. This isn't something where you're just building one factory. This is something where You've got to scale out the entire system. And these are things that take a long, long time to actually take place. And so you have to get the permitting, you have to figure out all the environmental studies, you have to put the lines in place, you have to put the towers in place. You've got to worry about the, you know, the transformers and the electrical components, the meters, everything in front of and behind the meter. There's a lot of supply chain that has to be built out. There's a lot of capex associated with those supply chains. And so, you know, one of the interesting things, guys, that we, as we're talking to investors that, that have heard the story before and now it's starting to become part of the narrative, people wonder where are we in the, the build out of this? What's, what inning are we in? You know, that's the, the parlance, right? And, and they wonder is this. Because I've heard it so much now, is this something that is just about ready to, you know, turn over or, or are we in the early innings? And, and we would argue wholeheartedly that we're in the early innings of this build out because it is such a long project and it is something that requires so many stages to, to actually take place. And so along with that, there's unavoidable bottlenecks that are going to be around for a while. And you know, to your point, Michael, I think that is good in terms of, you know, kind of as a governor, to prevent all the, the throttle to be down and releasing all the gasoline in the engine. It does kind of slow things down and causes a process to unfold over the next several years?
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A
Ryan, who is responsible for the build out? Is it governments and municipalities? Is it, is it these tech providers that are building the data centers? Like, who ultimately is on the hook for building these? Build this build out?
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D
Yeah, it's a, it's a mixture. It's a coordinated effort between the large technology companies that are making these, you know, hundreds of billions of dollars of investment, along with the power companies, the merchant power companies, and the integrated or vertically integrated utilities, along with governments. Governments have to be the ones that actually approve the regulations and, you know, allow for these things to, to take place. And so if any one of those parts of the system doesn't do its job or doesn't, you know, move along, it's, it's going to slow things down. And so you have to have the, the utilities adding infrastructure to the system to be able to connect new sources of Generation with new sources of demand. You have to have the hyperscalers agreeing to fund their part of what the added costs might be, or you're going to have, you know, customers are going to lose their minds over increased utility costs.
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A
Are we already seeing that now where people are homeowners, households are paying more for their electricity because of this?
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D
Yeah, I think data centers do have a bit of a PR problem because of that. I think the narrative probably doesn't line up with the reality, and that's often the case when you think about utilities in our infrastructure has needed investment for a long, long time. And so the cost of that investment to upgrade and expand power grids is already going to increase cost for consumers. There's just no two ways about it. I mean, even in the absence of any of the data center build out or any of the reshoring of manufacturing and things like, you know, all these other trends that are adding to electricity demand, you're going to have increased costs because these are poles and wires and transformers and things that have been in existence for a long time that need to be modernized, especially if you're going to integrate new sources of demand or of supply, rather like, like wind and solar. And so then the question is, well, do you want these large hyperscalers to come in and contribute to that build out? Because they may actually, even though costs could go up, they could cause costs to go up less because they're actually helping to pay for the modernization of power grids and even the ongoing operation of those utilities. You know, a lot of a big portion of that is actually fixed cost. And these, you know, these utilities have an allowed rate of return, the regulated monopolies in many cases. And so if you're able to spread that fixed cost out among more kilowatt hours that are consumed, you can actually lower the cost per kilowatt hour, which, you know, counterintuitively means that data centers could actually be better for consumers than they would be in the absence of those data centers. But you know, to, to your point, Ben, I think data centers have really, and, and AI in general has to do a better job in communicating what those benefits are.
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C
Ryan, how do you know so much about this stuff? What's, what's, what's your day job?
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D
My day job is. That's a very good compliment. I am the ETF strategist at First Trust. And so we spend a lot of time with my team kind of investigating what the themes are, the trends that are going to drive market performance that are not already well represented. In broad indexes. So you know, we, we look at what is in the S&P 500. There's a lot of semiconductors embedded in the index and maybe you want to overweight semiconductors, that's great but there's really not a lot of exposure to many of the themes that have been more popular in the broad indexes like the power grid for example. You know, you're not getting a lot of power grid companies if you just buy the S&P 500. And so we want to know what the stories are, what the drivers might be going forward. So I've, I've been with first trust for 26 plus years now and I've had the pleasure of working with some really smart people and I just learn from them.
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C
This ETF, you're right, looks nothing like the S&P 500. There is the top 10 holdings are companies that most casual listeners or investors have never heard of. 32% of the fund as of 3-31-2026 is in electrical components. 12% is in multi utilities. Another 12% is in diversified industrials. This is not micron, western, dig, sandisk, amd etc. Like this is not that I have a broad question. When we say what inning is it or what time is it or however you want to discuss where we are in the cycle, it's really tricky because there can be a big difference between where we are in the cycle from like the actual build out and use case of this AI infrastructure, power, etc. We can be very early there where this could legitimately have another three years, another 15 years like, like we're just beginning but then there's a stock piece of it and those might be on different schedules. It might be 3 o' clock here but 11:30 there. And that happened in the dot com bubble and right. Like the Internet was a thing and it barely had even started when the bubble burst. I'm not suggesting that this is going to follow suit but like it's a really interesting thing to think about. So when I look at grid, this thing is up 100% over the last three years and I think somebody might look at this and say oh I missed it. And I think that is probably the way that the average investor thinks and I think the average investor is usually wrong when they think about these things. Now yes, of course some things triple in over a three year period and you buy the top and they crash. Of course it happens all the time but for something like this, I think the general attitude towards this whole thing is It's a bubble. And I mean, I don't, I understand that point of view. I don't necessarily know that I share that, that opinion. What's your take on everything that I just said? And I know it was a bit of a ramble.
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D
Yeah, no, I think there is definitely the perception when you've seen something run up that it's easier to think, I'm going to wait for it to come back down. I want to wait for a sell off to happen. And I'm sure there will be sell offs between now and the next 10 years that investors may say, oh, now is the time that I can get in at a cheaper price. On the other hand, they may say, well, you know, it's, it's going down and it's, it's going to drop like the dot com bubble did when that burst, you know, this is going to come back down. So why would I want to own, I want to buy these assets as they got cheaper. And you know, that's the whole psychology of investing. And that's why most people are unsuccessful at investing, especially in these sorts of themes. The way that we look at it is we're not going to time it perfectly. We know that these, when we talk about themes like the power grid, we very rarely try to make short term calls where we say we're going to own this for the next month or the next three months. We look at this as being over the next decade, you're going to see massive, massive amounts of capital investment in the power grid. And it really is not just dependent on data centers. That's what's driving the narrative now. But at the same time, my hometown of Syracuse, New York, we're building the Micron chip fabs there. There's, they're going to build four chip fabs over the next 20 years and they're going to spend $100 billion doing so. And you've got to supply power infrastructure to those chip fabs. There's a lot of manufacturing that's coming back online that's driving demand for power grids. There's just failing power grids. You know, every time there's a storm that passes through, people are familiar with losing power. And that's because their power grids are old. They're not hardened. They need to be invested in. And so one of the things that we like about this way to think about the AI theme is that it's not fully contingent on data centers. Yes, it's going to benefit from data centers, but if data centers slow down if we decide we've built enough, you still have a backlog of demand. There's still a few year backlog of demand for power grid. And you know, I love, I love illustrations where you can kind of compare two things. So here's my, my comparison for you. The power grid over the next 25 years according to Bloomberg is going to add something like 17 million miles of transmission and distribution lines. And the comparison is that's enough length to go back and forth to the moon 37 times.
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A
Oh, Michael likes these ones.
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D
This is going to make sense. 60 million miles of length to the power grid and that's basically here to Mars when they're at the closest point.
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A
Sorry to cut you off.
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D
Yeah.
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A
In 2019 and 2020, this fund was up more than 40%. It was up almost 30% in 2021. So that's before ChatGPT was even a thing. And you had really great performance. So I'm curious because if you look at like the just the top 10 holdings in this, in this fund, there are some names that you recognize in the top 25 holdings, but the top 10, maybe some companies that people are aware of, but not, certainly not household names. So maybe you could just go through us with the process of how you go about picking the fund because it looks like, I don't know, just eyeballing it, the top five or six companies at least make up, I don't know, 40% of the total or so.
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D
Yeah, it is a market cap weighted fund and really we work alongside our index provider, which is nasdaq. They consult with a firm called Clean Edge and, and all they focus on at Clean Edge and they've been working as a consultant to the index since we launched our fund back in 2009. They created the index slightly before that, but what they're focused on is identifying companies that generate a substantial amount of their revenue from what we'll call power grid related activities. And so these are the things that we've been talking about, the electrical components, the transmission lines, you know, those materials, the cabling. So you know companies like Prismian, the grid engineering, so Quanta would be an example, you know that the, all that electrical equipment companies like Eaton and Schneider Electric and ABB and Johnson Controls and all these names that are very, you know, you don't think of these as sort of the sexy semiconductor names, but the index provider is screening for revenue and essentially it's 80% goes into pure plays, market cap weighted, 20% goes into sort of businesses that have some involvement in the power Grid, but they're not driving the revenue. So for example, they're not the main driver of the revenue. So you know, Nvidia has had a small position in the fund, capped at 2%. And that's because Nvidia has very important grid related software. They, if you want to manage efficiently your, your flow of electricity, Nvidia's got amazing solutions for that. And so we do have some exposure to companies like Nvidia.
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A
So why is, why is Nvidia have a cap on it?
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D
Just because they're not a pure play in terms of the grid related component.
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A
Okay. So there's like, there's guidelines or things you have to check in a box to be a certain weight in the, in the index.
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D
Yeah, exactly. The revenue coming from Nvidia's, you know, power flow management software is not anywhere near what they're generating from their GPUs. And so yeah, we, we do have a cap to incorporate some of those important companies that are involved in the power grid, but they're not, they're not the most important driver to the business.
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C
What do the earnings of these companies look like? So we've been talking a lot about the storage and the memory companies, Micron and SK and the others where the earnings were $9 a share a year and a half ago and now they're $135 a share. Like explosive growth. Does it look similar here and then as a follow up, what are the valuations look like?
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D
Yeah, the growth level is not what you're seeing in, you know, Micron. The pricing, power and the revenue that Micron and some of the other chip companies have had over the last several quarters has been nothing short of remarkable. It's been explosive to your point. And a lot of that is because they're so supply constrained in terms of what they're, they're putting out there. They can charge whatever they want to. When it comes to the growth that we've seen for some of the companies in our portfolio, it's more like 15, 20% earnings growth on sort of the, as a portfolio. And so, you know, the good news is it's not explosive, but it is fairly consistent. And as we look forward, you know, I think the supply constraints that you have for some of the chip names, it's really no different for, you know, some of the companies that are in our portfolio. You're not going to have the ability to meet that supply for maybe a little bit longer time, but as a result it is a bit more steady. So not the level of growth that you're seeing with the chip names, you're also not paying the valuations that you would with some of those names. You're trading as a portfolio at about 24 times forward earnings. That is, when you look at the overall portfolio towards the upper end of the range over the last decade. But I think that reflects just the realities of the situation where you're seeing the potential, you know, this relatively robust earnings growth potential for upside going forward, I think is reflected in that slightly elevated multiple.
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A
So what I think one of the cool things about ETFs in general, especially this decade, is just the growth in thematics, in the ability to invest in a sector like this. If you have a belief, what would you say to someone who says, well, why wouldn't I just buy the utilities etf? I'll just buy a utilities sector. What's the difference between that, that sector fund versus what you guys are doing?
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D
When we create a thematic etf, it's not really necessarily constrained by what, you know, GSCI says or some. One of the, one of the index provider says is involved in a sector, it's really often spanning a variety of sectors. So this fund in particular has, you know, some industrials, some utilities, some international companies, some US companies. The question is different. It's not how do you represent a specific sector. It is how do you benefit from this trend that's playing out over the next several years. And so it's a very, it's a much more tailored focus when you're talking about thematic funds than it is when you're investing in sector funds. Sector funds definitely have their place. We have a lot of sector funds at first Trust, but, but that's when we're thinking about themes. It's what is the trend, how is the trend playing out and what sort of companies are going to benefit? And then can we create a portfolio that represents those companies?
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C
Damn, you're good.
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A
Is the way that things go now with the building of the power grid. Are there any alternative energy sources that could come into play to help? Or is it like. No, this is, this is just kind of the way things go. And the alternative energy sources are so far out in the future, it wouldn't make a dent in any of this.
- [26:21]
D
One of the great things about a power grid fund is that we don't really necessarily care what the source of power generation is. That being said, I think there's amazing technology that's on the horizon. Whether we're talking about cold fusion, which is always, you know, for the last Few decades has been 10, 10 years off. So we'll see if that comes to fruition or whether it's small modular nuclear reactors. And you know, there's, there's huge promise for all these technologies having more efficient ways to generate power, but they all still need the same sort of infrastructure if you're going to build them into the system.
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A
So if those clean energy sources do come, your, your fund is positioned to benefit either way?
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D
I think so, yeah. Yeah. Especially because the current power grid system is not positioned, wasn't created for those sorts of sources of generation. It wasn't. It was, it was. The power grid was patched together over the last century to manage generation that was centrally located from burning coal or something like that. And then everything flows downstream. When we think about the new power grid that has different sources of generation, different intermittency of that generation, batteries integrated, two way flow of electricity because, you know, someone generates solar power and they want to sell it back onto the grid, all of that requires a different kind of power grid and a different set of technology and. Yeah. So I think either way we're well positioned with this fund to benefit from that build out.
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A
Perfect. Ryan, if we want to have people learn more about the fund, where do we send them?
- [28:03]
D
A great place to find more information on the fund would be our website, which is ftportfolios.com I don't know if I can give a plug for the first Trust ROI podcast while I'm on your podcast, but that's another place where you can.
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A
That's what podcasts are for.
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D
We've been hosting our podcast for the last few years and that can be found on all the podcast platforms as well. So we talk about these things and other topics on the podcast that I host.
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A
Perfect. Thanks so much, Ryan.
- [28:28]
D
All right, thanks guys.
- [28:31]
A
Okay, thank you to Ryan. Remember, check out ftportfolios.com to learn more about GRID. Email us animalspiritscompoundnews.com.