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Infrastructure Spending - How Much Juice for Clean Energy & the Grid?

On August 10th, the Senate voted in favor of a $1 Trillion bill that addresses a wide array of infrastructure funding, notably power and transportation. Two key areas of spending are modernizing the power grid and, more broadly, mitigating negative climate impacts through clean energy. While the bill still needs to get through the House this coming week, we decided to look at stocks most likely impacted by these aspects of the proposal to understand the broader characteristics and key common factor influences that have and will continue to drive risk and performance.

For this week’s analysis, we will focus on two ETFs as proxy universes for power grid and clean energy-related stocks:

ICLN - iShares Clean Energy ETF
ICLN invests in global energy companies, defined as those involved in biofuels, ethanol, geothermal, hydroelectric, solar, and wind industries. Aside from holding companies that produce energy through these means, ICLN also includes companies that develop technology and equipment used in the process. (Source: ETF.com)

GRID - FirstTrust Clean Edge Smart Grid Infrastructure Index Fund
GRID targets global equities determined to be in the smart grid and electrical energy infrastructure sector. The sector may include businesses in the electric grid, electric meters and devices, networks, energy storage and management, and enabling software. (Source: ETF.com)

Style Exposure DNA

To better understand the fundamental characteristics of the stocks within these ETFs, we looked at the median style exposures in the Wolfe QES Developed Markets model. We used the median exposure to eliminate the effect that stock weights would have on a weighted-average exposure.


As shown above, the Volatility factor is the highest current style exposure for both ICLN and GRID, though ICLN’s median exposure is more than twice GRID’s level (1.33 vs. 0.55). In the Wolfe risk model, Volatility encompasses both market beta and residual beta.

ICLN is also much more heavily value-oriented, with a median Book-to-Price exposure of 0.77 relative to GRID’s -0.02.

The median Short Interest exposure in GRID is -0.39, which means that many names in the GRID ETF either have a low short interest level or have an inverse correlation to stocks with high short interest. As a result, stocks with negative exposure to this factor have faced strong systematic headwinds when confronted with short squeeze events in the market.

Two of the most significant differences between the two ETFs are Momentum and Revisions. While GRID’s median exposures to the Momentum and Revisions factors are 0.45 and 0.39, respectively, ICLN is underexposed to both at -0.15 and -1.76.


The Revisions factor measures the trailing 3-month changes in consensus EPS and Sales Growth. Since March of this year, power grid-related stocks have seen an upward trend, while clean energy-related stocks have seen quite the opposite. This disparity reflects a significant difference in the way analysts are projecting growth for these two universes as represented by equal-weighted versions of ICLN and GRID.


Momentum also tells an intriguing story. While the equal-weighted version of GRID has been relatively consistently positive on Momentum exposure, ICLN went from a peak of 2.2 down to its current level of -0.2. The lookback window for calculating Momentum is 12M-1M. Because clean energy stocks experienced a meteoric rise in the months following the COVID crash, Momentum exposure was at exceptionally high levels at the beginning of 2021. However, that performance has come down significantly, resulting in an underexposure today.

Macroeconomic Impacts

Given that we're focused on macro-influenced industries and macro factors have been a strong force in the market, we decided to look at the recent performance of the two equal-weighted ETFs through the lens of the Axioma Worldwide Macro Projection model. From a macro factor perspective, we found that the critical return drivers were very consistent. The two most significant contributors to return on a YTD basis in both segments were Inflationand Commodity due to their positive beta exposures, which added 13.9% and 11%, respectively.

ICLN (Equal-Weighted) Performance Contribution


GRID (Equal-Weighted) Performance Contribution


However, when we look at total performance, the power grid-related stocks in GRID outperformed the clean energy-related names in ICLN by over 36%. When comparing the alpha contribution to return in the Axioma Macro Projection model, it’s clear to see why. The clean energy names experienced a YTD alpha drag of 21.3%, while power grid names saw 5.6% positive alpha. Thus, while systematic drivers of returns have been somewhat comparable, the idiosyncratic risks inherent in clean energy stocks have played out negatively of late.


ESG Footprint

A prominent driver behind the current bill is sustainability and the promotion of environmentally-friendly infrastructure. Below, we decomposed ICLN and GRID based on their Environmental, Social, Governance, and Overall ESG ratings as supplied MSCI. Both ETFs are top-heavy in Environmental, with >50% of the stocks in each receiving a rating of 6 or higher. GRID has a better showing in the Social pillar, and the two ETFs are relatively similar in the Governance space, sitting nearly entirely within the 4-8 range.


Investors looking for opportunities in the infrastructure space will find some variety by way of ESG practices, so research and screening will be beneficial in aligning with sustainability goals.

Next week, we intend to look beyond securities explicitly tied to the infrastructure bill to uncover additional market areas that the proposed provisions could positively and negatively impact.

US & Global Market Summary

US Market: 08/16/21 - 08/20/21

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US Stock Market Cumulative Return: 8/16/2021 - 8/20/2021
  • All major US indices rose on Friday, but for the week, the S&P 500 slid 0.6%, the Dow declined 1.1% and the Nasdaq Composite lost 0.7%.
  • While there was positive economic news and earnings, market concerns about the sharp rise in U.S. COVID cases, hospitalizations and deaths have tamped down bullishness.
  • The Federal Reserve suggested in its latest meeting minutes that officials believed the economy might recover enough by year-end to warrant a shift in its massive asset purchase program.
  • New weekly jobless claims fell more than expected to a fresh pandemic-era low.
  • Retail sales figures were below forecasts and fell by 1.1%, reversing a 0.7% rise from a month earlier.
  • WTI crude oil slid more than 9%, taking energy stocks downward.

Normalized Factor Returns: Axioma US Equity Risk Model (AXUS4-MH)

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Methodology for normalized factor returns
  • Value continues its tear and sits atop the US factor leaderboard for the 3rd straight week, finally back in positive territory and a far cry from its recent bottom of -2.22 SD below the mean on 7/8.
  • Momentum headed higher for the 7th consecutive week, one of only 3 factors to show upward strength.
  • Last week’s slowing of Profitability is now stagnation and represents the first stretch since late June that this factor hasn’t been on the rise.
  • Volatility slid for the 7th straight week and looks to be building downward force once again after a slight breather last week. We recently discussed this factor at length in a multi-part series, not coincidently 7-weeks ago in this article.
  • Size continues to show some weakness and fell for the 4th straight week.
  • Market Sensitivity (Beta) dropped even further into negative territory and sits at -1.02 SD below the mean.
  • Growth once again took the biggest slide this week, falling -0.53 standard deviations and leaving Overbought territory in its rear-view.
  • US Total Risk (using the Russell 3000 as proxy) decreased by 12 basis points.

Normalized Factor Returns: Axioma Worldwide Equity Risk Model (AXWW4-MH)

Screen Shot 2021-08-21 at 12.48.40 PM.png
Methodology for normalized factor returns
  • Global Value, in lockstep with the US, continued to rally and ratchets up another half standard deviation but failed to cross the mean like its US counterpart.
  • Profitability continues its recent tear and moves further into positive territory.
  • Size also shows strength and rounds out this week’s positive movers.
  • Earnings Yield continues to tick down after peaking on 8/9.
  • Volatility increased its bleeding since last week and remains Oversold at -1.48 SD below the mean.
  • Growth fell by 0.36 standard deviations and exits its Overbought label as it sinks further towards the mean.
  • Global Total Risk (using the ACWI as proxy) decreased by 13 basis points.


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