A deep dive into IFRA, VanEck's infrastructure ETF

Infrastructure is an asset class that is often overlooked by investors, yet it has the qualities of low volatility, capital stability and predictable distributions.

Every day we rely on infrastructure such as roads, railways, airports, bridges, tunnels, water supplies, sewage, energy grids, and telecommunications, for our basic needs.

Infrastructure is essential for the smooth running of a modern society, and is also critical for economic growth as it enables trade and investment.

An easy way for investors to buy into the infrastructure asset class is via ETFs. One ETF that ticks all the right boxes is IFRA, which is the VanEck FTSE Global Infrastructure (Hedged) ETF.

IFRA is found in InvestSMART’s Property and Infrastructure Portfolio, and makes up 24.75% of the portfolio as of 31 March 2023.

There is also a 2% - 3% holding of IFRA in each of Investsmart’s Conservative, Balanced, Growth and High Growth investment portfolios.

Performance

The following table shows the total returns of IFRA, separated into price and income components for the period ending 31 March 2023. The inception date for IFRA is 29 April 2016.

As can be seen from the table, the ETF has decreased in value over the past 12 months, primarily due to rising interest rates and a weaker economy, but the long-term returns have still been quite good.

So, let’s take a closer look at IFRA.

IFRA

The VanEck FTSE Global Infrastructure (Hedged) ETF (IFRA) has $826m AUM (Assets Under Management) as of the 31 March 2023.

The objective of the ETF is to provide investment returns (before management fees) that closely track the returns of the FTSE Developed Core Infrastructure 50/50 Hedged into Australian Dollars Index. The ETF’s management fee is 0.52%, and the fund invests in a total of 133 infrastructure securities.

Here is a list of IFRA’s Top 10 holdings as of 31 March 2023.

The fund invests in infrastructure companies from all around the world, including the US with 57.8%, Canada with 9.1%, Australia with 8.3%, Spain with 6.6%, and the United Kingdom with 3.4%.

The largest sector weightings in the fund are Electric Utilities with 31.3%, Transportation Infrastructure with 21.5%, Multi-Utilities with 14.6%, Oil, Gas & Consumable Fuels with 11.6% and Road & Rail with 7.2%.

So, what are the key pros and cons of IFRA ETF?

Pros and Cons

First the Pros. With 133 infrastructure securities from around the world, the IFRA ETF provides wide diversification across assets, sectors and geographies.

As infrastructure stocks are essential services, they are non-cyclical and generally resilient to economic turbulence. They are long-term assets, and can usually raise prices with inflation. As such, they provide shareholders with a steady flow of distributions that gradually increase over time.

With high barriers to entry, infrastructure stocks are in many instances monopolies, where rates are agreed to in long term government contracts.

There are, however, some risks (cons) with regards to this ETF and infrastructure investing in general.

One risk with IFRA is its currency risk. The IFRA ETF is notionally hedged into Australian dollars by rolling one-month forward foreign exchange contracts. As such, it’s not fully hedged and has some exposure to currency movements.

A general risk with infrastructure is that rises in interest rates can cause problems with companies with large debt levels. Another risk is that unexpected and costly maintenance may be required in the event of a major outage or problem with the infrastructure.

Some infrastructure assets may have associated political and regulatory risks, particularly in countries where there is governmental instability. Some infrastructure projects may also carry environmental, social or reputational risks.

And finally, there is always the risk of cost blowouts and lengthy delays with any major infrastructure development work.

The mitigating of stock-specific risk, however, can be achieved with a well-diversified portfolio of infrastructure assets, such as that provided by IFRA.

Infrastructure is an important asset class that provides diversification and a regular stream of income, and should be part of any well-diversified portfolio. That is why it has been included in several of InvestSMART’s investment portfolios.