A $1.5 Trillion Tidal Wave is About to Flood this Tiny Sector in the Next Decade

During the past year, exchange-traded fund (ETF) investors have welcomed a plethora of new funds to the marketplace. These new funds cover everything from municipal bonds to emerging market financials. But one of the most intriguing of this latest batch is a fund that covers a hitherto unexplored niche.

What’s so exciting about this new fund is that it invests in companies that develop and implement one of the most important technologies to come about in a long time. It holds the key to securing an independent, “green” energy future for the United States right in the palm of its hand.

Uncle Sam has recognized this technology’s potential and, through generous grants and matching investments from utilities, has unleashed an $8 billion tidal wave that is washing over the sector.

I’m talking about “smart grid” technology. And if you haven’t heard about this game-changing technology yet, you will.

But first, some background.

The electricity grid refers to the transmission systems that deliver electricity from power plants to regional substations, and the distribution equipment that routes the power from substations to homes and businesses. This outdated infrastructure has been woefully underfunded during the past half-century — paltry investments for maintenance and upgrades haven’t kept pace with steadily rising generating capacity.

In short, we’ve spent plenty to produce more power to meet the nation’s growing needs, but very little to actually get it from point ‘A’ to point ‘B’. As a result, the grid has become overburdened and in desperate need of a major overhaul. Estimates made by the American Society of Civil Engineers put the price tag well into the trillions.

For his part, President Obama has made it clear that transitioning to a smarter, 21st century grid is a top priority. Last October, the administration pledged $3.4 billion in stimulus grants to help speed up that modernization. In addition, long overdue expenditures made by the nation’s 3,000 utilities will bring that total closer to $8 billion.

The goal isn’t simply to alleviate congestion and reduce the threat of blackouts and other power disruptions. A smarter grid will be well-insulated from potential cyber attacks. It will also be optimized to make sure power is delivered as efficiently as possible. In part, that means equipping the system with automated two-way communication and installing smart home appliances that can lower energy use during times of peak demand.

The U.S. Department of Energy summarizes these enhancements as making the power grid more reliable, efficient and secure. Getting there won’t be easy. Yesterday’s infrastructure wasn’t designed to carry power from remote wind farms in South Dakota to homes in Chicago. But ultimately we’ll have a responsive, adaptable system that can adjust the flow of electricity to reduce power consumption and lower utility bills.

Obviously, this spells tremendous opportunity for the dozens of companies involved in this nascent field. For many, $8 million would be a huge influx of cash, let alone $8 billion — and that’s just a down-payment for the $1.5 trillion that will be needed during the next decade.

Companies that make intelligent power distribution equipment and other electrical hardware and devices will be obvious beneficiaries. But there will also be a need for software, energy storage, monitoring equipment and other related products.

Take digital smart meters, for example, which will be installed in more than 40 million homes within the next few years. That rush will lead to plenty of orders for manufacturers like Itron (Nasdaq: ITRI), which my colleague Andy Obermueller reports just landed a major deal with CenterPoint Energy (NYSE: CNP).

At $200 per meter, this contract alone could add $44 million to the firm’s bottom line, triple what it earned last quarter. Add it all up, and it’s easy to understand why General Electric (NYSE: GE) believes this one market could generate $12 billion in annual sales within the next five years.

Virtually every major player with an interest in this high-stakes game can be found in the new fund’s portfolio I mentioned earlier. It’s the FT Nasdaq Clean Edge Smart Grid (Nasdaq: GRID) ETF. Some of the holdings are conglomerates like GE and Siemens (NYSE: SI) with other lines of business, but I like the fact that 80% of the fund’s assets have been reserved for pure-play specialists like iTron.

Action to Take –> GRID is uniquely positioned to cash in on the wave of funding that will soon inundate the relatively small smart-grid sector. But there is enough diversity among the fund’s holdings to ensure that shareholders also have exposure to other sub-sectors of the green energy movement.

Like any relatively new fund, it has been a bit volatile, so risk-averse investors need to be cautious. But I think many of its holdings have powerful catalysts in their favor that could deliver triple-digit gains during the next few years. I will be monitoring the fund as a potential addition to the “Sector Trading” Portfolio for my ETF Authority newsletter. I suggest you do the same.