Talk Your Book: Investing in the Power Grid

0:00Ben Carlson:Today's Animal Spirits Talk, Your 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. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick 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.

0:38Ben Carlson:Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:46Ben Carlson: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 trade. 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.

1:17Michael Batnick:I thought you were a picks and shovels guy. Is this not part of the picks and the shovels?

1:20Ben Carlson:That is picks and shovels. If I was on CNBC, that's what I would say, yes. True. That's what you want to own. The 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? And if you go in any -

1:38Michael Batnick:Wait, whoa, whoa. What was this movie? I can't remember what it was called.

1:41Ben Carlson:Bobby D built power lines? 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? They look like they've been here forever. Why aren't they underground or something? And it sounds like the whole AI buildout has made many people realize that we need to update this grid. See what I did there?

2:04Michael Batnick: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.

2:12Ben Carlson:That's it, I think. Sam Rockwell may be in it.

2:14Michael Batnick:But the star is John Travolta, not De Niro.

2:17Ben Carlson:No, no, no. Tell Claude they're wrong.

2:21Michael Batnick:I searched De Niro's filmography and there's no Powerline movie in it. So it's almost certainly Travolta.

2:26Ben Carlson:Everybody's Fine, 2009 movie.

2:29Michael Batnick:Okay, you know what? Oh yeah? What about Everybody's Fine? Drew Barrymore, Sam Rockwell, Kate Beckinsale, and Robert De Niro. I never heard of it.

2:39Ben Carlson:Let's see what Claude has to say for itself. All right, anyway, what were you saying? Anyway, on today's show, we talked to Ryan Izzacanin. Ryan is a senior vice president ETF strategist at First Trust. and they have an ETF that is trying to take advantage of, I guess not trying to take advantage. It was there well before the AI boom happened to build out the power grid because they thought there was necessary to see a big boom in the power grid or a big upgrade in the power grid. And you've got some numbers on 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.

3:17Ben Carlson:So what did it grow to? It's that$12 billion fund now? Just about. Anyway, and it's a lot of companies you've never heard of. Some of you have, but it's a very interesting thought experiment. You talk about what Taiwan Semiconductor being the transistor of the governor to 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's our talk with Ryan Izzykainen from First Trust.

3:50Michael Batnick:Ryan, welcome to the show. Hey, thanks for having me, guys. 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. So I looked on, I went on the white 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.

4:28Michael Batnick:So a lot of the interest has come over the last, let's say since 2025, the AUM has sextupled, six tupled, it's up six X. I don't know if I said that properly, but anyway, what's the story with grid? Why, why all of the interests from investors? Uh, I know this is a softball question, but here we go. First one. Well, I think it's one of those adjacent, um, themes alongside the build out of AI. And that's what a lot of investors have focused on recently. Um, it's really, when we think about where the bottlenecks are and, um, you know, what, what could cause AI to not be deployed as quickly, uh, as many people might want it to be, It's the demand for power.

5:10And 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 you mentioned, it's been around since 2009. So it's not 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.

5:49It was designed, you know, 100 years ago for centralized power generation and everything 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.

6:29The objective hasn't changed. But the driver has really accelerated over the last few years.

6:34Ben Carlson:What at what point did you realize like, oh, this our fund is an A.I. play? Like, what was that aha moment for you? Like, OK, this is this is something new now. Three years ago, my team published a piece where 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 more electricity. We obviously didn't know that you were going to have AI in 2022. November 2022, you're sitting around the Thanksgiving table with your family and trying to figure out what ChatGPT was. We had no idea.

7:14The grid operators had no idea. They thought that we'd have just that under 1 % increase in power demand year over year that we'd had over the last couple decades. It was really 23, 24 as those estimates started to get ratcheted higher that we recognized that this is something where you're going to have massive amounts of demand if this continues. And it's only accelerated since then. And so it's really been over the last, you know, I'd say two or three years that we recognize that this was one of those adjacent plays to the build out of AI.

7:48Michael Batnick: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 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 framing that a lot is like, all right, Taiwan Semi, they can only generate so many chips per minute, per hour, per day.

8:32Michael Batnick:We haven't spent a lot of time talking about 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? 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 is all, you know, you build power lines, it goes through somebody's yard. It goes through somebody's business. There's a lot of regulation that is required that is just unavoidable.

9:15And 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 I think there is still a massive amount of actual length to the power grid that you're going to have to add to not just the U.S., but also Europe, also Asia, also the developing world. And it's a massive, massive amount of infrastructure that has to be built. And 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.

9:59And 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 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 one of the interesting things, guys, as we're talking to investors that have heard the story before and now it's starting to become part of the narrative, people wonder, where are we in the build out of this?

10:35What inning are we in? You know, that's the parlance, right? 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 are we in the early innings? 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 actually take place. And so along with that, there's unavoidable bottlenecks that are going to be around for a while. And to your point, Michael, I think that is good in terms of kind of as a governor to prevent all the throttle to be down and releasing all the gasoline in the engine.

11:19It does kind of slow things down and causes a process to unfold over the next several years.

11:24Ben Carlson:Ryan, who is responsible for the build-out? Is it governments and municipalities? Is it these tech providers that are building the data centers? Who ultimately is on the hook for building this build-out? Yeah, it's a mixture. It's a coordinated effort between the large technology companies that are making these 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 regulation and allow for these things to take place.

12:02And so if any one of those parts of the system doesn't do its job or doesn't move along, it's going to slow things down. And so you have to have 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.

12:35Ben Carlson:Are we already seeing that now where people are homeowners, households are paying more for the electricity because of this? 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 costs 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 all these other trends that are adding to electricity demand, you're gonna 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 wind and solar.

13:31And 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, a big portion of that is actually fixed cost. And 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 could actually lower the cost per kilowatt hour, which counterintuitively means that data centers could actually be better for consumers than they would be in the absence of those data centers.

14:20But to your point, Ben, I think data centers have really, and AI in general, has to do a better job in communicating what those benefits are.

14:30Michael Batnick:Ryan, how do you know so much about this stuff? What's your day job? 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 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.

15:11You'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 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 learned from them.

15:28Michael Batnick: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 March 31st, 2026 is in electrical components. 12 % is in multi-utilities. Another 12 % is in diversified industrials. This is not Micron, Western Dig, SanDisk, AMD, et cetera. 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, et cetera.

16:16Michael Batnick:We could be very early there where this could legitimately have another three years, another 15 years. Like we're just beginning. But then there's a stock piece of it. And those might be on different schedules. It might be three o 'clock here, but 1130 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.

16:50Michael Batnick: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 three 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. 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.

17:30I 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, and now is the time that I can get in at a cheaper price. On the other hand, they may say, well, it's going down and it's going to drop like the dot-com bubble did when that burst. This is going to come back down. So why would I want to own, why would I want to buy these assets as they got cheaper? And 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.