ASGI - With BlackRock Betting On Infrastructure You Should Consider IFRA

2024-01-15 23:55:59 ET

Summary

• iShares U.S. Infrastructure ETF is an equities exchange-traded fund focused on infrastructure-related stocks.
• The vehicle has an AUM of $2.2 billion, a Sharpe Ratio of 0.56 (3Y), and a dividend yield of 2.15%.
• IFRA outperforms CEFs like Reaves Utility Income Fund and abrdn Global Infrastructure Income Fund in terms of total returns, emphasizing capital appreciation over yield.
• The fund has an equal 50/50 split between infrastructure enablers (construction, materials) and operators (utilities, energy transportation).
• Traditional asset classes like infrastructure are seeing a resurgence, exemplified by BlackRock's $12.5 billion acquisition of Global Infrastructure Partners.

Thesis

The week that ended January 12 was an exciting one, with significant shifts in the asset management industry. On one hand, Bitcoin ETFs finally got the green light from the regulators, with a plethora of funds coming to market via numerous asset managers. Bitcoin is an expression of the new digital economy, and via this launch, it has established itself as a portfolio asset class that cannot be ignored anymore. On the other hand, 'old-school' asset classes like infrastructure, the complete opposite of Bitcoin, are also making a comeback. BlackRock announced on Friday, January 12 a major $12.5 billion acquisition in the infrastructure asset management space:

BlackRock said on Friday it would buy Global Infrastructure Partners (GIP) for $12.5 billion in a major bet on alternative assets and announced a shake-up of its top management. The deal, which includes $3 billion in cash and 12 million BlackRock shares, will put the asset management giant at the heart of investing in ports, power, and digital infrastructure projects around the globe. Once the deal closes, the firm will hold approximately $150 billion in infrastructure assets across a portfolio that ranges from the U.S. liquefied natural gas export market to wastewater services in France to airports in England and Australia.

GIP is a major player in the infrastructure business, having been in the sector for close to 20 years, and has played a pivotal role in many marquee transactions.

Retail investors also have the means to invest in the infrastructure sector via ETFs and CEFs. In this article, we are going to discuss an outstanding choice in this sub-sector, namely the iShares U.S. Infrastructure ETF ( IFRA ).

Analytics

• AUM: $2.2 billion
• Sharpe Ratio: 0.56 (3Y)
• Std. Deviation: 20.15 (3Y)
• Yield: 2.15%
• Premium/Discount to NAV: 0%
• Z-Stat: n/a
• Leverage Ratio: 0%
• Composition: Materials, Industrials, Utilities (Infrastructure related equities)
• Duration: n/a
• Expense Ratio: 0.3%

Structure and composition - a blend between operators and enablers.

IFRA is an exchange-traded fund that invests in the infrastructure sector. The vehicle does not undertake any leverage given its format and provides investors with a 2.15% dividend yield. When compared to CEF structures in the sector the dividend yield is small, however, the fund makes up for it via a high total return.

As per its literature, the ETF:

seeks to track the investment results of an index composed of equities of U.S. companies that have infrastructure exposure and that could benefit from a potential increase in domestic infrastructure activities.

The index at hand is the ' NYSE FactSet U.S. Infrastructure Index ' which provides for an equal 50/50 split between infrastructure enablers such as construction companies and material companies, and infrastructure operators such as utilities and energy transportation and storage companies. The index is U.S. based, so while some businesses may derive revenues from outside the country, most of their cash-flow streams come from the United States. The index is reconstituted annually and rebalanced quarterly.

Given its underlying index, the ETF has a composition that blends utilities with industrial and materials companies:

Utilities make up 39.4% of the collateral pool, followed by Industrials at 31.9% and Materials at 18.4%. Its top holdings contain both well-known utilities as well as steel and aluminum producers:

US Steel ( X ) which was recently the target of an acquisition , still subject to regulatory approvals, is in the collateral pool, and so are other materials companies such as Century Aluminum ( CENX ).

The fund components have a low valuation starting point, with the portfolio P/E ratio at 14.74x:

There are 154 names in the collateral pool, and the fund has a volatility performance in the line with the overall market, with a beta of 1.03 and a standard deviation of 20.15%.

Low yield, high total returns

The fund's 30-day SEC yield is a paltry 2.15%, but long-term returns are much more appealing: the ETF has posted trailing 3- and 5-year total returns of 9.7% and 12.4% respectively. When comparing this ETF with CEFs in the infrastructure space we see an outperformance:

When comparing the fund with the Reaves Utility Income Fund ( UTG ) and the abrdn Global Infrastructure Income Fund ( ASGI ), IFRA is the clear winner on a total return basis. The fund does not provide for a high current yield but does generate a high capital gain.

That is one of the main differences between the CEF and ETF structures. CEF investors can bet on the constant extraction of a high dividend yield from the underlying asset class, but that does not necessarily translate into long-term outperformance. IFRA is therefore more appropriate for those investors looking for exposure to the infrastructure asset class but who do not necessarily need a high current dividend stream.

Investors looking at clipping constant high yields should look at the CEFs in the space, which usually provide for 8% to 10% dividends, but also have a higher volatility profile due to their leverage.

Risk factors and historic performance

The main risk factor for this name is represented by rates. The fund was down -3.3% as rates rose in 2022, and deriving a historic proxy also yields negative total returns in the year rates moved higher or the Fed engaged in quantitative tightening.

Given IFRA's composition, we derived a historic proxy for the fund since it was launched in 2018:

Utilizing a 50% Materials ( XLB ) and 50% Utilities ( XLU ) proxy gives very similar annual returns for the overlapping periods. Historically this portfolio build has a high sensitivity to rising rates, being down in the years the Fed raised them or engaged in quantitative tightening. Given the respective risk factors and the fact that rate hikes are behind us, we are comfortable with a positive forward outlook for IFRA. Moreover, it is notable that the annual negative performance for IFRA and its proxy has not exceeded -7% in the past 14 years of data, which gives it a conservative tilt.

IFRA is therefore a blend of materials and utilities providing for a conservative take on the market and with a high sensitivity to interest rates. From a fundamental standpoint, the two themes marry up, with governments and private institutions investing more in new projects on the back of lower rates when IRR hurdles are lower.

Conclusion

IFRA is an equities exchange-traded fund. The vehicle has a blended composition of infrastructure enablers (materials and industrial companies) and infrastructure operators (mainly utilities). The fund came to market in 2018 but has posted very robust total returns since the IPO. Despite its low 2.15% dividend yield, the ETF has a high annual total return stemming from capital appreciation. The fund's main risk is composed of interest rates, with rising rates resulting in the ETF losing value. With rate hikes behind us and a renewed interest from the asset management community in infrastructure, IFRA is a robust choice for retail investors looking for capital appreciation from the infrastructure sub-sector.

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