GRID ETF: A Powerful Rally, But Be Mindful Of Valuation And Concentration (NASDAQ:GRID)

Earlier this month, BofA reported that, according to EPFR fund flow data, infrastructure funds experienced their biggest net inflow since June 2022. This comes as the price of copper soars and the AI theme seeps its way into the Utilities sector. Still, the cyclical Industrials space has actually underperformed the S&P 500 in the past month. So, there are mixed signals going on with respect to stocks exposed to global growth.

I have a hold rating on the First Trust NASDAQ® Clean Edge® Smart Grid Infrastructure Index Fund ETF (NASDAQ:GRID). While the fund sports a strong chart with robust momentum, I am growing increasingly concerned about the valuation.

Big Flows Into Infrastructure

According to the issuer, GRID is designed to track the performance of an index of common stocks in the grid and electric energy infrastructure sector. The index includes companies that are primarily engaged and involved in electric grid, electric meters and devices, networks, energy storage and management, and enabling software used by the smart grid infrastructure sector.

Ranked No. 2 in its ETF sub class, per Seeking Alpha’s ETF Quant Ranking system, GRID is a moderate-sized fund with $1.35 billion in assets under management as of May 17, 2024. GRID garners a very strong A+ share-price momentum grade, and I will detail key price levels on the chart later in the article. Investors should be aware that the strategy comes with a somewhat high cost – a 0.57% annual expense ratio.

Moreover, income investors may want to shy away from GRID considering that its trailing 12-month dividend yield is just 1.1%, materially lower than that of the S&P 500. The fund is moderate on the risk scale given its historical standard deviation trends and a portfolio that is concentrated within a specific global investment theme. But GRID’s liquidity profile is mixed considering average daily volume of 82,000 shares and a 30-day median bid/ask spread of 10 basis points, so I encourage investors to use limit orders during the trading day.

Digging into the allocation, GRID plots in the upper-right section of the Morningstar style box, indicative of its large-cap growth bent. Roughly one-third of the ETF is considered mid- or small-cap, so there is added cyclical risk. Furthermore, greater than half of the portfolio is non-US, so there is diversification from a geographic perspective. But with a price-to-earnings ratio that is now near 20, there is a price to pay for the strategy, particularly considering that the long-term EPS growth rate is 10, implying a PEG ratio close to two.

GRID: Portfolio & Factor Profiles

GRID’s allocation is high in the Industrials sector with a significant overweight in Utilities. The former sector has lagged while the latter has produced alpha in recent weeks. There is a tech theme with the fund, too, given an 18% weight in the growth-focused Information Technology sector. With close to 40% of GRID exposed to its top 5 biggest stocks, investors should pay attention to fundamental developments with those companies.

GRID: Holdings & Dividend Information

Seasonally, this niche ETF has been around for many years, and we’ll find that the June through July stretch has historically been a bullish period, so that’s a bullish consideration for active investors.

GRID: Bullish Seasonal Stretch Ahead

The Technical Take

While GRID’s valuation and concentrated portfolio are concerns, its technical situation is very strong. Notice in the chart below that shares broke through key resistance in the $107 to $108 range back in the first quarter and then held that area on a pullback last month. With shares within a percent of all-time highs, the bulls are clearly in control of the primary trend. That assertion is backed up by the rising 200-day moving average and the RSI momentum oscillator at the top of the graph which has moved between 40 and 90 since late last year – a notable bullish zone.

Where could GRID go from here? Technically, if we take the $35 range height from the consolidation pattern that lasted from late 2021 through early 2024, then an upside measured move price objective to $142 is in play based on the breakout above $107-$108. So, there is another 15-20% of potential upside now through, say, year-end based on my assessment of the chart.

Overall, GRID’s technical setup is very healthy as price breaks to new highs.

GRID: Bullish Breakout Targets $140-$145

The Bottom Line

I have a hold rating on GRID. While I like this one for a swing technical trade idea, the valuation is no longer a bargain and any hiccup in the global growth story could have a significant impact on shares.