Major market moves have occurred due to earthquakes, tsunamis and hurricanes over the past few years, so why couldn't an extreme geomagnetic sun storm that collapses power grids and melts down satellites produce the same effect on markets? In a recent article National Geographic outlined the effects of an extreme solar storm. Given mankind's reliance on electricity, the consequences of this natural event could make other disasters seem short lived.
If you haven't heard, a solar storm reached Earth on Thursday and the U.S. National Atmosphere and Oceanic Administration (NOAA) is concerned about potential power grid, satellite and radio disruption and failures. According to the NOAA news release the moderate to strong geomagnetic storm is here due to a recent solar explosion.
While this storm appears to be somewhat uneventful thus far, it is only the beginning of greater geomagnetic storms expected to arrive over the next year according to scientists. Is this a weather related event that could move markets? And how would one play it? Let's examine.
According to the NOAA, the most severe geothermic storm (rated a G5) could have the following impact:
click to enlarge
Clearly potential power grid failures or collapses would materially impact companies doing business in this industry and related technology - both suppliers and providers. In addition, communications systems could also be impaired making power grid repair and coordination an inefficient task. So yes an extreme geomagnetic storm, or an expectation of it, would be a market moving event for grid companies in particular. But how likely are these extreme solar storms?
Astronomers report that the Sun is beginning a more active phase of its eleven year cycle and thus more frequent and severe storms could be on their way over the next year. This week a BBC report quoted a scientist addressing the latest solar storm and the Sun's upcoming behavior:
Dr Craig Underwood, from the Surrey Space Centre, UK, said: "The event is the largest for several years, but it is not in the most severe class. We may expect more storms of this kind and perhaps much more severe ones in the next year or so as we approach solar maximum.
While it seems the current storm is only a warning shot, there is an ETF to keep an eye on should an extreme solar storm warning come from the NOAA: The First Trust NASDAQ Clean Edge Smart Grid ETF (GRID). According to the ETF's fact card it tracks an index of:
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.
From this description it seems likely that GRID's holdings would qualify it as the most likely ETF to be affected by G5 occurrences like grid collapses and blackouts. But how does GRID compare to a utility or industrial ETF option?
GRID isn't your average utility or industrial ETF as it has delivered a different path of performance over the last two years. Here's a performance chart illustrating the performance of GRID compared to XLU, the SPDR Utility ETF and XLI, the SPDR Industrial ETF.
Reviewing GRID's sector breakdown, 80% is invested in industrials and thus XLI should be the best comparison. However unlike XLI which has a wide range of industry exposures, GRID focuses on the companies in the electrical space based off a pure play index methodology. This includes companies that have exposure to alternative energy technology like batteries that allow for smarter management of power grids. Here are GRID's top ten holdings and sector breakdown.
In comparison, here are XLI's holdings according to its fact card and broken down by industry.
Based on the pure play nature demonstrated in the data above, GRID appears to be the best way to play future solar storms, or expectations of them, over the next year. While this trade could be profitable, let's hope this unique idea collects dust in the "just in case" folder or is used for the next Bruce Willis movie.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.