Smart grid ETFs lead surge in sustainable infrastructure investments amid policy tailwinds and technological shifts

Over the past ten months, the sustainable infrastructure investment space, particularly funds focusing on clean and smart grid technologies, has witnessed remarkable growth and evolving dynamics. Morningstar’s classification shows that while the number of focused sustainable mutual funds and ETFs in the infrastructure category has shrunk, the overall assets under management in this segment have doubled to $5.2 billion, now ranking 13th among 74 long-term sustainable investment categories.

This surge is largely driven by the dominant player in the space, the First Trust NASDAQ Clean Edge Smart Grid Infrastructure ETF (GRID), which commands approximately $4.7 billion or 90% of the category’s assets. Unlike many other sustainable infrastructure funds, GRID does not explicitly apply ESG screens or exclude companies based on sustainability criteria. Instead, it is a thematic index fund that invests in companies generating the majority of their revenues from smart grid and electrification technologies. This emphasis on technology associated with the energy transition has resonated well with investors, as seen in its notable performance.

As of October 2025, the GRID ETF posted a strong 12-month return of approximately 22%, outperforming the S&P 500 by over five percentage points. This outperformance has attracted institutional investors such as Richard P Slaughter & Associates Inc., which disclosed a new $7.3 million position in the fund, underscoring growing confidence in the smart grid infrastructure theme. The fund’s portfolio comprises leading companies such as Schneider Electric, ABB Ltd, National Grid Plc, Johnson Controls International, and Eaton Corporation, with a significant sector focus on electrical components, multi-utilities, and diversified industrials. These holdings highlight the fund’s strategic exposure to the infrastructure technologies essential for modernising electricity grids.

Beyond GRID’s growth, other sustainable infrastructure funds within the category have also shown solid, if somewhat more modest, performance. Funds employing more traditional environmental, social, and governance (ESG) criteria, such as the Brookfield Next Generation Infrastructure Fund, emphasize high ESG standards and exclude sectors like fossil fuels, tobacco, and weapons. This fund and others with similar ESG integration approaches posted solid gains averaging 4.1% in October and 23.4% over the trailing year, benefiting greatly from alignment with key infrastructure performance drivers.

These drivers include the electrification and AI-related power demand spurred by rising investments in grid expansion, high-voltage cables, and grid-hardening, projects estimated to require trillions of dollars globally over coming decades. Additionally, policy incentives such as the U.S. Inflation Reduction Act and the European Union’s Green Deal continue to fuel demand for green infrastructure technologies and renewables. Finally, the market’s “peak rates” narrative, suggesting that interest rate hikes have peaked, has generally benefited long-duration assets like listed infrastructure, offering stable cash flows in a less volatile rate environment.

However, within the sustainable infrastructure category, performance has diverged based on fund strategies and holdings. Funds with higher exposure to core or diversified infrastructure, covering assets like towers, toll roads, utilities, and water, have seen respectable but more subdued returns, partially impacted by restrictions related to fossil fuel exposure and short-term interest rate concerns.

It is also notable that several sustainable infrastructure funds with low assets under management have been liquidated this year, including those from BlackRock, JPMorgan, Kayne Anderson, Macquarie, and VanEck. This consolidation suggests a market gravitation towards larger, theme-focused funds like GRID that offer clearer exposure to rapidly growing segments within infrastructure.

GRID, despite not explicitly branding itself as an ESG-integrated fund, has shown a stronger alignment with clean energy through its significant allocation to Clean200 companies, firms recognised for substantial clean revenue streams, which make up 41% of the fund versus 22% in its benchmark. Nevertheless, the fund retains a notable allocation to fossil fuels (around 20%), highlighting the complex trade-offs in infrastructure investing where traditional energy assets may remain part of operational grids and transition pathways.

In summary, the sustainable infrastructure investment landscape is being reshaped by growing investor appetite for technologies linked to smart grids, electrification, and AI-driven infrastructure enhancement. The First Trust NASDAQ Clean Edge Smart Grid Infrastructure ETF (GRID) stands out as the key beneficiary of these trends, supported by strong policy tailwinds and a market environment favourable to long-duration infrastructure assets. Meanwhile, funds that blend ESG integration with diversified infrastructure exposure continue to offer steady but more moderate returns. This evolving segment reflects the broader urgency, and opportunity, arising from the global energy transition and efforts to build smarter, greener infrastructure systems worldwide.