While most energy transition funds chase the next clean technology breakthrough, the TCW Transform Systems ETF (PWRD) has quietly amassed more than $1.5 billion by betting on a less glamorous thesis: the United States doesn’t have enough transformers, power lines, or electricians to support the coming surge in electricity demand.

Key Takeaways:

• PWRD focuses on infrastructure bottlenecks like transformers over speculative clean tech.
• The fund reached $1.5 billion with 20.71% year-to-date returns from 20 to 30 stocks.
• Horton cites AI demand and nuclear growth as drivers, with grid limits as the main tech risk.

The actively managed fund targets physical infrastructure bottlenecks that Eli Horton, managing director and senior portfolio manager at TCW Group, views as the real constraint on everything from artificial intelligence (AI) expansion to electric vehicle adoption.

Rather than speculating on unproven technologies, PWRD concentrates on 20 to 30 companies positioned to capitalize on what Horton describes as the largest capital investment cycle in history, driven by approximately $5 trillion in annual spending by the end of the decade.

PWRD has delivered a 20.7% year-to-date return and pulled in $332.75 million in net inflows this year, according to ETF Database. The fund’s 17.7% one-month return reflects growing investor recognition that the energy transition requires more than solar panels and wind turbines.

3 Pillars Driving Investment

Horton frames the opportunity around three converging forces reshaping energy markets. Energy security has moved to the forefront following geopolitical disruptions in the Middle East and Russia. Electrification is accelerating as manufacturing returns to the United States, electric vehicles proliferate, and buildings add automation systems. Decarbonization continues as a multi-decade effort to migrate the global economy toward renewable sources.

See more: AI Pivot: Electrification Infrastructure in Focus

The confluence creates an unprecedented buildout requirement, according to Horton. The average U.S. high-voltage transformer is 35 years old, exceeding its 30-year performance peak. Supply chains can’t keep pace. New high-voltage transformers require two to three years to acquire, and natural gas turbines are sold out through 2029 or 2030.

Labor compounds the problem. Engineering, procurement, and contracting firms lack the skilled workers needed to build new power plants and transmission infrastructure, according to Horton.

AI Amplifies Power Demand

Artificial intelligence (AI) acts as “gasoline on the fire” for power consumption, according to Horton. While AI growth may experience choppiness similar to the early internet era, physical grid limitations pose the primary risk to the AI boom rather than lack of demand.

This power requirement has sparked a bipartisan resurgence in nuclear energy, according to Horton. Nuclear provides carbon-free baseload power 24 hours a day, making it attractive for data centers and industrial facilities that can’t tolerate interruptions. He expects a build-out of the U.S. reactor base and the eventual emergence of small modular reactors in the early 2030s.

The fund’s top holdings reflect this infrastructure focus. GE Aerospace (GE) leads at 7.8% of assets, followed by Vertiv Holdings Co. (VRT)  at 7.5% and Safran (SAF) at 5.9%, according to ETF Database. The portfolio also includes exposure to Broadcom Inc. (AVGO), Powell Industries Inc. (POWL), and GE Vernova Inc. (GEV).

Active Management Makes the Difference

Horton points to the S&P Clean Energy Index’s underperformance versus the S&P 500 since 2004 as evidence that broad clean energy exposure doesn’t work. Many ESG-labeled companies rely on government subsidies or unproven technology, creating unreliable returns.

PWRD’s active strategy allows rapid reallocation, according to Horton. The fund moved from a 25% allocation in oil and gas in 2022 to just 3% recently, while increasing power and grid exposure to 50% of assets. Higher interest rates have created dispersion between good and bad businesses, providing fertile ground for stock pickers.

The fund charges a 0.75% expense ratio and launched in February 2022, according to ETF Database. As an actively managed, non-diversified fund, PWRD can concentrate positions more than traditional index products.

Horton’s strategy rests on a simple observation: before the world can run on renewable energy, it needs to rebuild the century-old grid carrying that energy to homes and businesses. The fund’s $1.5 billion in assets suggests that investors are starting to agree.

Originally published on Advisor Perspectives

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