Investing in an Electrification ETF? Figure Out Its Angle First

There are numerous electrification ETFs on the market — and they are about as predictable as the country’s aging power grid.

It’s a theme that hits on a few big market trends: rising needs for power generally, data center buildouts and a need to update parts of the grid to make it more reliable. While those all bode well for electrification, the ETFs focusing on the category often have different approaches, and their performances vary considerably. The Tortoise Electrification Infrastructure Fund (TPZ), for example, has returned about 6% year to date, while the Global X US Electrification ETF (ZAP) returned 10% and the Tema Electrification ETF (VOLT) returned 25%.

“You generally run into that type of problem when you get into thematic funds — they don’t really fit a clear definition of a sector or a theme that’s well accepted,” said Daniel Sotiroff, associate director of manager research at Morningstar. Electrification, for example, may include utilities, big energy companies and areas related to the buildout, like critical minerals, among others. “What does the [fund’s] title actually mean, at the end of the day?”

Charging Cycle

A few years ago, the electrification narrative was all about electric vehicles, which fell out of favor but have regained momentum amid high oil prices, said Nate Miller, vice president of product development at Amplify ETFs. Increasingly, that also includes hybrid vehicles, which new-car buyers have favored, he noted. Similarly, artificial intelligence is affecting the energy sector in different ways, with higher demands for electricity but also for power backups or load management, which can include massive diesel generators, he said. “Power has been a critical bottleneck. Can you even get power to the site you want to build a data center at?” he said. 

The strains and weak points of the US power system hint at the potential for electrification as a theme:

• A failure of nine substations across the three major power grids could cause a nationwide blackout that could last a year and a half or longer, per federal data and reporting by The New York Times.
• That is largely due to the long delivery time for new transformers, which is up to 128 weeks. And one bottleneck is a specialty type of steel made by just one mill in the US, per the report.
• Data centers are gobbling up more and more power, on track to account for as much as 17% of electricity by 2030, per data cited by Quartz.

Alternating Current: Investors interested in the theme should review the ETF’s thesis before buying, Miller said. An EV-focused fund, for example, might experience more cyclicality than broader energy-sector funds, he noted. And those focused on metals and minerals may be affected by the president’s executive order this summer that sought to increase access to critical materials, he said. “You do want to open the hood and make sure you understand what you’re getting exposure to, because not all themes are allocated to in the same way.”