Infrastructure ETF: Does this important industry also deliver high returns?

Roads, schools, hospitals, telephone lines… infrastructure is the basis of our modern life. But does the high importance of the sector also affect the companies involved? We analyse whether an infrastructure ETF is worthwhile and what the industry’s prospects for the future are!

What all counts as infrastructure? More than you think!

When we talk about infrastructure, the first thing that usually comes to mind is roads with potholes. You might also think of the sluggish expansion of the fibre-optic network in Germany. Both points are, of course, correct, but the area encompasses much more!

The field is divided into technical and social infrastructure for a better overview. Often, a third area is added, ‘green infrastructure’ (nature reserves, parks and green spaces, water management …). Let’s take a look at what all this includes and is potentially available for investment in an infrastructure ETF:

Technical infrastructure

The transport network, of course, includes all the streets, motorways, and railways for local and long-distance transport, but also the maintenance of waterways for inland shipping and everything related to air traffic (airports, flight safety). Public transport is also included.

Due to the ongoing privatisation, the supply of energy in the form of electricity, gas or district heating has been somewhat neglected. Fuels also fall into this category and are provided by a network of petrol stations.

The area of communication includes our telephone network and the internet, both via cable and mobile. Broadcasting (television and radio

In addition, the supply and disposal (drinking water, waste water, waste collection…) and even the financial infrastructure from banks, tax and currency systems fall under the area of technical infrastructure.

social infrastructure

When it comes to social infrastructure, the focus is usually on schools, universities and similar educational institutions. However, the sector actually encompasses much more than that! Childcare, orphanages, nursing homes and care services are also included.

The entire healthcare system, including hospitals and ambulance services, also comes under social infrastructure. In addition, there are cultural facilities such as museums and libraries.

Public safety is also particularly important. This includes the police, disaster relief and civil protection or national defence. Social security through insurance (e.g. unemployment, long-term care or pension insurance) is also part of the infrastructure.

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Infrastructure ETF: a lucrative investment with a promising future

The infrastructure sector is extremely extensive and extremely important for our society. It is only thanks to this sector that our modern life with all its conveniences is possible at all. As always, an important field is also a potentially lucrative investment!

Anyone who invests in the entire sector with an infrastructure ETF is spreading their money very widely. Although by no means all parts of our infrastructure are accessible to private companies and investors (aviation security, orphanages, water supply, etc.), a wide selection is available from a wide range of sectors and nations.

What is particularly interesting is that, while demand for infrastructure projects may fluctuate, it will never disappear completely. Roads will always need to be repaired, bridges built, energy supplies secured and hospitals operated!

For investors, an infrastructure ETF therefore offers access to a particularly promising industry. The predicted growth is also enormous: despite the impending recession, around 57 trillion dollars are expected to be invested in infrastructure worldwide by 2030.

These include, among other things, the energy transition or the enormous expenditures that will be necessary as a result of the climate catastrophe (dikes, disaster protection, water supply over thousands of kilometres, desalination plants…). So here, too, an infrastructure ETF is very future-proof.

Thousands of projects are pending not only in the industrialised nations; massive expansion is also taking place in the Middle East, India and many emerging markets. Infrastructure is therefore a genuine megatrend!

In many cases, the respective states are the sponsors of the individual projects – private financing would often not be possible due to the size. This ensures additional security and predictability!

If you are also interested in other future ETFs, then read the articles on ETFs for electric mobility, 3D printing ETFs, semiconductor ETFs or ETFs for renewable energy.

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Which infrastructure ETF is the right one?

The infrastructure sector is solidly represented among industry ETFs. Several infrastructure ETFs are available and offer different focuses. Investors can, for example, filter their investments by region or sustainability.

1. iShares Global Infrastructure UCITS ETF

The iShares Global Infrastructure UCITS is an absolute heavyweight when it comes to infrastructure ETFs: more than €1.8 billion is invested in this fund! It invests in the largest infrastructure companies from around the world.

In practice, this leads to a high degree of concentration in the North American market: more than three quarters of the securities held come from the US and Canada! Looking at the sectors, we see a high proportion of services (52 per cent), industry (23 per cent) and energy (12 per cent).

In the past, investors were able to generate decent, but not necessarily impressive returns with this infrastructure ETF. However, in recent months it has been on a steep decline, as the poor economic sentiment is weighing heavily on companies. The comparatively high costs of 0.65 per cent per year are also a particular pain as a result.

But a crisis is also always an opportunity: entry at the low point could prove very rewarding in the long term, as the industry generally has excellent prospects for the future. However, as always, correctly identifying this low point is difficult…

2. iShares Emerging Market Infrastructure UCITS ETF

Are you looking to invest in an infrastructure ETF without the US and do you have strong nerves? Then the iShares Emerging Market Infrastructure UCITS ETF could be the right choice for you! Investments are made in infrastructure companies in emerging markets.

China, Hong Kong, Brazil and Mexico are the top positions. Industry and services are the most important sectors, each with almost 40 per cent, followed by energy with around 19 per cent.

However, investors should be prepared for a rollercoaster ride: returns have ranged from minus 45% to plus 66%! Not many investors are keen on this, apparently: the volume of this infrastructure ETF is only 53 million euros, even though it has been available since 2008. The high costs of 0.74% p.a. could also be a factor.

Here, too, brave investors can speculate on a future increase. Particularly in emerging markets, significant infrastructure projects are on the agenda in the next few years, from which this infrastructure ETF would benefit.

3. iShares Smart City Infrastructure UCITS ETF

Smart cities are a particularly interesting sub-sector of infrastructure. They include modern solutions for human coexistence, such as intelligent vehicles and buildings, the Internet of Things, e-commerce, intelligent supply and disposal, and more.

With the Smart City Infrastructure UCITS ETF from demiShares, you can invest specifically in companies that are active in this area. About half of these are companies from the USA and about 10% from Japan, with significantly smaller shares from the UK, Canada and other countries. This infrastructure ETF offers comparatively good diversification!

Although it has only been offered since 2020, the Smart City ETC has already reached a volume of an impressive €276 million. At 0.40% per year, the costs are also significantly lower than for other infrastructure ETFs.

In terms of performance, things don’t look too rosy here either; however, the start right before the beginning of the coronavirus crisis was extremely unfortunate, so a little forbearance should be shown. Nevertheless, investors were still able to achieve a return of around 20% here in 2.5 years.

The iShares Smart City Infrastructure ETF lags behind the MSCI World. However, as this is a very future-oriented sub-sector of the industry, a long-term investment could be worthwhile.

If you prefer to invest in economically oriented ETFs, I recommend you read the article on financial sector ETFs and industry ETFs.

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Conclusion: a good time to enter the market for infrastructure ETFs

Many infrastructure ETFs are currently at rock bottom, as the aftermath of the coronavirus crisis and the current recession are taking a toll on corporate earnings. However, an investment could therefore be particularly worthwhile at present due to the often excellent future prospects!

Infrastructure ETFs track companies that play a huge role in our lives. They provide our energy supply, build roads, bridges, airports and the like, provide internet access and ensure that our rubbish is disposed of.

Since they are often contracted by states and the projects are often on a huge scale, the profits are also attractive and secured in the long term. This is because enormous sums are being invested in infrastructure around the world, including in emerging markets.

With an infrastructure ETF, investors benefit from a high level of diversification: numerous sectors are directly or indirectly dependent on the infrastructure sector and are included in corresponding funds. If you also pay attention to a geographical distribution and avoid concentration (usually on the US market), you are extremely well positioned for the future.

Entering an infrastructure ETF could therefore be a sensible long-term investment. The current price declines could indicate a sensible time to enter.

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FAQ – Frequently asked questions about infrastructure ETFs