3 Stocks to Watch in Electrification ETF ELFY

Electrification is emerging as a significant investment theme, driven by the substantial power demands of AI data centers, creating notable opportunities for investors. The ALPS Electrification Infrastructure ETF (ELFY), which targets firms in renewables, battery technology, and electricity transmission, has demonstrated strong performance, returning 11.9% over three months and 26.5% YTD, outperforming both its category averages and the S&P 500. Key contributors to this performance include holdings like Vertiv Holdings, Inc. (data center infrastructure), Coherent Corp. (electrical components), and MasTec (clean energy infrastructure), underscoring the critical infrastructure build-out supporting the AI revolution.

Analysis

The burgeoning AI sector is creating a significant secondary investment theme centered on electrification, driven by the substantial power requirements of data centers. The ALPS Electrification Infrastructure ETF (ELFY) provides targeted exposure to this trend by tracking an index of large and mid-cap firms in renewables, battery technology, and electricity transmission for a 27 bps fee. The strategy has demonstrated strong recent performance, delivering an 11.9% return over the last three months, which outpaces its ETF Database Category and Factset Segment averages of 9.1% and 9.2%, respectively. Year-to-date, ELFY has returned 26.5%, surpassing the S&P 500 Total Return index. This performance is largely attributable to key holdings that are integral to the electrification infrastructure build-out. Notably, MasTec (MTZ), a clean energy infrastructure provider, has surged 47.6% YTD with a forward P/E of 32.5. Similarly, Vertiv Holdings (VRT), specializing in data center design and construction, has performed well and offered a 35% return on equity as of late September. Coherent Corp. (COHR), a component supplier, has also contributed with a 15.2% YTD return and a forward P/E of 24.9, underscoring the broad-based strength within the electrification value chain.

Key Decisions for Investors

• Investors should consider allocating to the electrification theme, using vehicles like the ELFY ETF, as a derivative play on the durable growth of AI and its associated energy consumption.
• Given the significant outperformance of individual holdings, further due diligence on specific companies like MasTec (MTZ) and Vertiv (VRT) may be warranted for those seeking more concentrated exposure to clean energy and data center infrastructure.
• While performance has been robust, it is prudent to monitor the valuations of key constituents, such as the forward P/E ratios for Coherent (24.9) and MasTec (32.5), to assess entry points and manage risk following the theme's strong run.
• For investors choosing the ETF route, the 27 bps expense ratio for ELFY should be factored into total return calculations when comparing against direct stock ownership or other investment vehicles.