Understanding Global Infrastructure ETFs

Infrastructure, and the investment opportunities associated with this sector, can cover a broad spectrum of activities, and consequently have often felt rather opaque for many investors. However, tools such as Trackinsight’s ETF Screener are helping to shine a spotlight ‘under the bonnet’ of this growing investment sector making it increasingly accessible to both professional and private investors alike. 

In this article we take a closer look at the different types of investments in the infrastructure space and consider the benefits of exposure to this sector within your portfolio. Finally, we review two ETFs offering access to a diversified basket of global infrastructure securities.  

Infrastructure in a nutshell

Infrastructure is the backbone of an economy. Traditionally it consisted of basic systems underpinning economic growth such as oil and natural gas pipelines, utilities, and roads and bridges. Nowadays, the definition has expanded to encompass renewable energy projects, telecommunication networks serving mobile and remote communications, and cloud systems storing digital data, among numerous other things. Infrastructure opens the door for development and prosperity for any given nation’s economy, businesses, and households. 

Five year outlook on infrastructure

Infrastructure projects are by default capital intensive. They require anything from several million up to trillions of dollars in spending over the foreseeable future to keep pace with economic growth. Experts believe that the infrastructure investing opportunity is global considering that around 80% of infrastructure expenditure is projected to be spent outside the United States and Canada.

Conventionally, governments used to undertake and invest in infrastructure projects but now the landscape has changed. The global transition towards digital and green economies, coupled with increasing sovereign debt levels, has accelerated the shift to the private sector in infrastructure spending, thus creating significant investment opportunities.  

How to access infrastructure investments

Investors can employ equity or debt instruments backed by an underlying project to directly access infrastructure investments. Alternatively, investors can purchase listed stocks of businesses operating or managing infrastructure projects. 

Investment time horizon and liquidity needs, among many other factors, play a crucial role in deciding which option to follow. For instance, the long investment horizon and low liquidity needs of pension funds, make it reasonable to invest directly in projects. On the other hand, the shorter time horizon and higher liquidity needs of many retail investors can mean investing in publicly listed infrastructure stocks is more appealing. 

The potential diversification benefits of infrastructure

Listed infrastructure equities often exhibit lower correlation with broad indices, preventing them from moving in tandem with the broad market and potentially reducing overall portfolio risk as a result. These stocks can also provide diversification on a geographic and sector level. For instance, it is not uncommon to find stocks in healthcare, information technology, and energy sectors falling under the infrastructure umbrella while trading across borders. Moreover, listed stocks have the ability to pay attractive dividend yields owing to the long-term nature of infrastructure projects and their consistent cashflows.

These factors combined, can result in lower price volatility providing investors a potential safety cushion during market downturns. 

Investing in Global Infrastructure ETFs

As broad market indices typically have little exposure to stocks directly involved in the development and management of infrastructure projects, dedicated Global Infrastructure ETFs might appeal to investors who wish to express a bullish view on the outlook for infrastructure.

These ETFs allow retail and institutional investors to overcome the complexities of picking individual securities, offering an easy and efficient way to fund infrastructure projects, including environmentally friendly initiatives. The ETF wrapper offers access to range of securities, either stocks or bonds or both, in a single basket that trades on a stock exchange, under a ticker symbol.

According to Trackinsight’s Thematic ETF Screener, there are 34 exchange traded funds adopting the ‘Global Infrastructure’ theme under the ‘Infrastructure’ trend, which captures the investment opportunity in the following two megatrends: ‘Rising Urbanization’ and ‘Demographic Shifts’. Together, they manage USD$18.76 billion[1] of assets as of September 16th. Out of these, 31 are equity ETFs investing in publicly listed infrastructure stocks whereas the remaining 3 invest infrastructure debt securities. 

On a sustainability level, 3 ETFs with USD$340 million of assets under management (less than 1% of total Global Infrastructure ETFs assets) follow an ESG investing strategy and/or are aligned to at least one Sustainable Development Goal (SDG).

BNP Paribas Easy ECPI Global ESG Infrastructure (XU61)

BNP Paribas Easy ECPI Global ESG Infrastructure (XU61) is a passively managed fund seeking to replicate the ECPI Global ESG Infrastructure index. It follows a full replication model where it invests in shares of businesses while respecting their weighting in the index. XU61 is geared towards companies benefitting from the growing demand for sustainable infrastructure development and maintenance including but not limited to transport, social services, water, waste management, human capital and corporate governance. Assets under management have reached USD$295 million spread across 100 different holdings and 10 countries benefitting investors with diversification requirements on a geographical and sector level. The ETF is aligned to the 11th SDG – Smart Cities and Communities – by implementing an ‘ESG Thematic’ investing strategy. It focuses on one sustainability theme while excluding securities that have a negative ESG impact, are subject to significant violations of the UN Global Compact principles, or are involved in severe ESG-related controversies. XU61 costs 0.3% per annum to own with a capitalization dividend policy where it reinvests generated income.

Xtrackers Municipal Infrastructure Revenue Bond ETF (RVNU)

Xtrackers Municipal Infrastructure Revenue Bond ETF (RVNU), unlike XU61, is a fixed income vehicle that tracks bonds (instead of stocks) that have been issued with the intention of funding federal, state, and local infrastructure projects such as public power systems, bridges, tunnels, water and sewer systems, toll roads, and many other public use projects. It aims to replicate the performance of the Solactive Municipal Infrastructure Revenue Bond Index. The latter only holds bonds issued by state and local municipalities whose interest and principal payments are generated from dedicated revenue streams or double-barreled entities (bonds backed by a dedicated revenue stream and a general obligation pledge). RVNU’s USD$139 million are spread across 814 constituents from 183 issuers[2]. It invests the entirety of its portfolio in the United States offering practically no geographical diversification. In contrast, it spreads its assets across 9 sectors ranging from Airport (31.73%) to Development (0.59%). The ETF does not have any ESG rating but it adopts the ‘Global Infrastructure’ theme. It is cheaper than XU61 costing 0.15% per year to own vis-a-vis 0.30%. It implements a distributing dividend policy where it distributes generated income to its shareholders.

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[1] Unless explicitly specified, data is as of September 16th, 2022.

[2] RVNU composition data is as of June 30th, 2022

Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.