The RocketCap Smart Grid Stock Index©

Posted on May 11th, 2009 by admin in Smart Grid

Our previous post explained why Smart Grid is important and that we’ll cover its investment opportunities. We identified 21 publicly traded companies that significantly focus themselves on Smart Grid.

To track the investment performance of the Smart Grid industry overall, we have created an index, in keeping with financial industry practice. We call our new index RocketCap Smart Grid Stock Index© (RSGSI)

RSGSI is based on the 21 Smart Grid stocks we selected.

(see previous post:  http://www.rocketcap.com/smart-grid-the-next-big-thing/ )

We explicitly use equal weightings of all 21 stocks. This is to avoid the gross distortions caused by the substantial differences in market capitalization among the 21 members of the index. The RSGSI is the equally-weighted average price of all the 21 stocks.

We combined the 21 RSGSI firms  into a portfolio, called the RocketCap Smart Grid Portfolio. We computed the Portfolio Diversification X-Ray (PDX) as well as the annualized ROI and standard deviation of ROI. These are shown in Table 1.  The results are dramatic.

( Review the meaning and usefulness of the PDX here )

Table 1: RocketCap Smart Grid Portfolio

2009-05-15_smart_grid_pdx_v6

RocketCap Smart Grid Portfolio

In the portfolio shown, the ROIs, standard deviations and correlations are all derived from closing prices for the 45 market days ending on 15 MAY 09.

The ROIs are the first important result.  This collection has portfolio ROI of 105%. This is simply huge! As a frame of reference, our NWO portfolios have ROI below 15% based on essentially same time frame. Of course, this huge ROI comes from the overall market rise during April. But it is way bigger than for other industries.

The volatility of 35% is pretty reasonable. Compare to the ^VIX volatility index, which dropped from 42% on 1 APR 09 to 33% on 15 MAY 09.

The PDX of the portfolio is 9%, consistent with very high correlations among firms over the past year or so. (Recall that the PDX for a portfolio is just the ratio of uncorrelated securities to all possible cross-correlations in the portfolio.)

We will monitor RSGSI and the PDX as the Smart Grid business evolves. One thing of immediate significance: Ambient Corp., which provides communication systems for Smart Grid and which has a partnership with Duke Energy, turns out to be uncorrelated with most of the other securities in the portfolio, including Duke.

Tollgrade Communication has a similarly uncorrelated relationship with other components of the portfolio. We will pay close attention to these two firms to see how their strategies and financial performance relate.

We also note that the utilities all have moderate correlations with each other. We  initially assumed utility monopolies in the same industry would have similar stock performance in these highly correlated days, but the matrix says not so. More stuff to reveal!

Comparison to Natural Benchmarks

Given how we preach the virtues of low correlation among investments, we naturally compare our new index to an established electric utility index. The Dynamic Utilities Intellidex (^DWU) is an an equally weighted index comprised of 30 components, each an electric utility stock. We have noticed some problems reliably getting the price data for this index. So we replace the pure index with a tradable ETF designed to closely track the ^DWU. This is the PowerShares Dynamic Utilities (PUI) ETF. It’s comprised of electric utilities selected to closely track ^DWU. So PUI is a good proxy for ^DWU.

We also want to compare both the RocketCap Smart Grid Index and the PUI with the overall market for large cap stocks, so we include the S&P 500 as measured by the ^GSPC.

The gross returns since 12 MAR 09 of PUI, ^GSPC and RSGSI are plotted in Figure 1.

Figure 1: RSGSI vs PUI vs S&P 500

Compare RSGSI to PUI and S&P 500

Compare RSGSI to PUI and S&P 500

These three indexes seem fairly close in their returns since 13 MAR 09. This is partly because the overall market had huge gains since then with almost all equities highly correlated. We will watch how these indexes evolve over time.

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