Tens of trillions of dollars are expected to be spent globally on infrastructure over the next several years, prompting many investors to give the sector a closer look.
Covering everything from electrical and water utilities and pipelines, to companies with contracts for managing bridges and freeways, the sector is expected to see a boom over the next decade. The U.S. alone is set to fork over at least US$1-trillion, based on its bipartisan Infrastructure bill expected to pass this fall.
Investors seeking low-cost, diversified exposure have plenty of choice among North American-listed exchange-traded funds (ETFs), including nine Canadian-listed options with global exposure.
Given the diversity of infrastructure itself, no two ETFs are much alike, says Ben Johnson, director of passive strategies for global manager research at Morningstar in Chicago.
“They all have very diverse contents when you lift the lids off the tins, leading to different performance,” he says.
Here are five ETF options for investors looking to bet on growing revenues from the expanding investment in infrastructure:
Asset under management (AUM): $240-million
Management expense ratio (MER): 0.73 per cent
One-year return: 37 per cent (All data from Morningstar as of Sept. 9 close)
The iShares offering provides global exposure for Canadian investors based on a benchmark created by Manulife Asset Management, with a very targeted view on the sector. In turn, its construction results in different performance from the U.S.-listed iShares Global Infrastructure Index ETF (IGF-Q), (with an MER of 0.43 per cent) which tracks the S&P Global Infrastructure Index.
“It’s been a material difference in terms of the two funds’ performance over the last three years,” Mr. Johnson says. Three-year annualized performance for CIF is more than 12 per cent compared with about 7 per cent for IGF.
One reason is the Canadian version is more concentrated in U.S. (about 54 per cent) and Canada (about 32 per cent) among its 60 holdings, with the remainder allocated to four other countries. In contrast, the U.S-listed ETF has 73 holdings, with 38 per cent U.S.-based, about 11 per cent in Canada and the rest in 17 other nations.
CIF’s top 10 companies differ from IGF’s too, including its top holding Quanta Services Corp., a service provider for infrastructure, while the U.S.-listed ETF’s top holding is energy firm NextEra Energy Inc.
MER: 0.61 per cent
One-year return: 20 per cent
Graeme Egan, president and portfolio manager of CastleBay Wealth Management in Vancouver, uses ZGI to provide sector exposure in portfolios. Tracking the Dow Jones Brookfield Global Infrastructure North American Listed Index, the ETF offers U.S. and Canadian exposure to publicly traded companies with more than 70 per cent of their revenues from infrastructure. Among its 47 holdings are American Tower Corp., which provides wireless communications infrastructure, and Canadian pipeline operator Enbridge Inc.
Mr. Egan notes ZGI “provides some non-correlation” to major indices. Over the last three years, the fund has periodically outperformed the S&P 500, for example. However, it trails the broad-based benchmark overall during this span by about 30-percentage points.
MER: 0.45 per cent
One-year return: 16 per cent
AGF is one of the more popular ETFs in this space since its launch in 2018, due to its competitive management cost, tied for the lowest in the sector, says portfolio manager David Kletz, vice-president of Forstrong Global Asset Management in Toronto. He says its proprietary quantitative selection process does “a good job of providing exposure to the infrastructure theme.”
Fund management uses multiple factors to create active allocations to different sub-sectors such as utilities and cloud-based infrastructure, across several geographies, using mathematical and statistical analysis of financial and economic data.
Still, it’s less globally diversified than its label suggests, with more than 50 per cent of holdings based in the U.S., 15 per cent allocated to Canada and the rest spread across 17 countries. Top holdings include American Water Works Company Inc. and Spanish wireless firm Cellnex Telecom SA.
MER: 0.97 per cent
One-year return: 16 per cent
Another actively managed ETF, the fund’s managers use a quality at “a reasonable price framework” to constitute the portfolio targeting firms with three infrastructure models, says Spencer Barnes, associate vice-president and portfolio manager for mutual funds and ETFs at Raymond James Ltd.
These are companies with long-term contracts to operate and maintain infrastructure such as pipelines and data infrastructure, operators of regulated utilities such as electricity and water, and more cyclically sensitive such as operators of toll roads or airports.
“You’re playing off the best of all aspects of publicly listed infrastructure, getting long-term stability but also a bit of the cyclical growth as a driver,” he says.
Among the most concentrated ETFs with 32 holdings, including Canadian firms Fortis Inc. and Northland Power Inc., more than 60 per cent of the portfolio is exposed to the U.S. and Canada.
MER: 0.47 per cent
One-year return: 58 per cent
For more targeted exposure to the impact of U.S. infrastructure spending, investors may want to look at PAVE, the only pure-play ETF focused on America aside from iShares U.S. Infrastructure ETF (IFRA-A).
“PAVE is one that benefited disproportionately from investors being enthusiastic about this theme,” Mr. Johnson says.
Tracking the Indxx U.S. Infrastructure Development Index, PAVE selects companies most likely to get a boost from U.S. infrastructure investment.
The top three of its 98 holdings are steel producer Nucor Corp., Eaton PLC – which provides services and products for electricity producers – and Trane Technologies PLG, an industrial manufacturer serving clean-tech and utility industries.
Another top-five allocation in PAVE is heavy equipment company Deere & Co., which Mr. Johnson says goes beyond tractors and combines to manufacturing excavators and other construction equipment.