Prime Minister Mark Carney speaks during a major projects announcement in Terrace, B.C., on Thursday.ETHAN CAIRNS/The Canadian Press
Ottawa’s decision to fast-track “nation-building” projects, combined with the billions of dollars being spent on artificial intelligence capacity, has investors reconsidering the case for infrastructure.
“Now is a moment for these [areas] to start attracting attention again,” says Daniel Straus, managing director of exchange-traded funds and financial products research at National Bank of Canada Financial Markets in Toronto.
Infrastructure, once considered an asset class investible mostly by pension funds buying stakes in hospitals and airports, has become increasingly accessible to retail investors, covering a wide swath of sectors from industrials and utilities to energy and, more recently, technology.
There’s also a growing number of ETFs offering exposure to both old and new economy parts of the sector.
The original thematic ETF
Infrastructure funds were among the original thematic ETFs that came to market in the 2000s, Mr. Straus says, starting with water ETFs. Today, Canada has more than a dozen active and passive infrastructure ETFs to choose from.
Two of the oldest infrastructure ETFs include iShares Global Infrastructure Index ETF CIF-T, created in 2008, and BMO Global Infrastructure Index ETF ZGI-T, created in 2010. Both are passive index-tracking funds, as are Mackenzie Global Infrastructure Index ETF QINF-T and Global X Artificial Intelligence Infrastructure Index ETF MTRX-T.
BMO Global Asset Management Inc. and BlackRock Asset Management Canada Ltd., which manages the iShares suite of ETFs, have also launched separate actively managed infrastructure ETFs alongside a handful of other providers such as AGF Investments Inc., CI Financial Inc., 1832 Asset Management LP, Franklin Templeton Investments Corp., Middlefield Ltd., Ninepoint Partners LP, Starlight Investments Capital LP and TD Asset Management Inc.
Mr. Straus notes that the management expense ratios (MERs) for infrastructure ETFs are slightly higher than those of traditional ETFs, especially the actively managed products. MERs range from about 0.45 per cent to 0.72 per cent for passive ETFs and from 0.45 per cent to 1.91 per cent for actively managed ETFs.
A defensive play in good and bad economies
The infrastructure theme is “always on,” says Massimo Bonansinga, portfolio manager, infrastructure and industrials at BMO GAM in Toronto.
He says the beauty of infrastructure is that it’s a defensive investment in both good and bad economic times. When the economy is underperforming, governments spend more on infrastructure to spur economic activity. And when the economy is outperforming, more infrastructure is needed to meet rising demand for electricity, energy and transport with new power plants, roads, bridges and airports.
“Its dual purpose makes it more stable and less impacted by [gross domestic product] moves,” says Mr. Bonansinga, who oversees BMO Global Infrastructure Fund, also available as an active ETF BGIF-NE.
Almost half of the holdings in the fund are in utility stocks, such as Juno Beach, Fla.-based electric utility holding company NextEra Energy Inc. NEE-N and Bilbao, Spain-based multinational electric utility Iberdrola SA IBDRY.
Mr. Bonansinga believes the utilities segment of the infrastructure space has a higher growth potential than industrials and energy, given the billions of dollars being invested in power and data centres to fuel the rapid growth of artificial intelligence.
“Technology can be executed much faster than [physical] infrastructure,” he says. “Infrastructure is physical. You need to have the components. You need to have the permits. So, it takes time, but we have in front of us a couple of decades of intense investments because of these technology changes, and infrastructure will take advantage of that.”
By geography, the U.S. accounts for about 40 per cent of the fund today, followed by about 25 per cent in countries across Europe and the United Kingdom – where he sees the most near-term investment – and Canada at about 13 per cent.
“Overall infrastructure is still the classic investment for the long run,” he says. “At the same time, there’s the added bonus of this accelerated growth that’s creating very interesting return opportunities for active management.”
The AI infrastructure angle
The interest in AI infrastructure led Global X Investments Canada Inc. to launch Global X Artificial Intelligence Infrastructure Index ETF in February, which holds stocks in areas such as power and energy infrastructure, data centre management and raw materials and energy sources.
Its holdings range from copper miners such as Antofagasta, Chile-based Antofagasta PLC ANFGF and Saskatoon-based Cameco Corp. CCO-T to U.S. technology companies such as Arista Networks Inc. ANET-N and Johnson Controls International PLC JCI-N.
“It offers exposure to the inputs behind the outputs,” says Alexander Smahtin, portfolio manager at Global X, of the fund’s holdings.
He says the fund is for investors who might not want to invest in software companies such as Nvidia Corp. NVDA-Q, or already have exposure and are looking for a more “picks and shovels” exposure to AI.
“An additional benefit is that, because it is infrastructure-focused, it has potential to be a bit more defensive in nature,” he says.
Watch for portfolio overlap
Because infrastructure holdings span sectors such as utilities, energy and industrials – and, more recently, technology – Mr. Straus says investors should consider how much overlap these funds may have with other stocks or funds in their portfolio.
He also cautions investors not to get overconfident about the sector, even as government spending appears to be on the upswing.
“It’s not necessarily the case that these things translate into strong stock market performance,” he says, adding that government spending tends to be rolled out slowly. And, sometimes, the hype is already reflected in the stock price by the time the announcements are made.