IFRA: A Solid Way To Invest In Rebuilding Infrastructure Of The USA (BATS:IFRA)

Summary:

iShares U.S. Infrastructure ETF (BATS:IFRA) represents a unique, targeted approach to solving a long-time, well-known issue in the United States: the country’s infrastructure (roads, bridges, transportation systems, utility grids, etc.) is crumbling, and not enough has been done about that. And, while investing in an ETF will not directly change the course of a decades-old problem for all Americans, it does potentially act as a vehicle to profit from long-awaited progress that is finally occurring on this front. I rate IFRA an “optimistic Hold.” I say that because while the market may toss around the prices of these stocks throughout this bear equity cycle, ultimately there is both growth and value here.

Strategy:

iShares U.S. Infrastructure ETF tracks the NYSE FactSet U.S. Infrastructure Index. It provides exposure to strictly US companies involved in the infrastructure sector and is made up of a diverse mix of companies from the transportation, energy, and water sectors.

Holding Analysis:

IFRA is widely diversified, with more than 150 holdings. As of this writing, every holding’s weight in the portfolio is less than 1%. So, there are no big single-stock bets here. This ETF is allocated evenly between owners and operators in the infrastructure industry (namely, railroads and utilities) and enablers, such as materials and construction companies.

Utilities, which are generally considered a critical part of “infrastructure investing” is the highest-weighted sector in IFRA, at nearly 40%. Industrials account for another 30%, and basic materials stocks are 22% in weighting. The rest of IFRA is invested primarily in energy stocks. Altogether, this sector allocation gives IFRA a “heavy industries” emphasis, which is not surprising, given the nature of infrastructure-related businesses.

IFRA is predominantly an ETF that owns smaller stocks, as nearly 90% of assets are invested across companies considered midcap, small-cap, or microcap. The latter two categories make up over half of the fund’s current holdings.

Strengths:

IFRA’s appeal is as much in its mission-related investing as anything technical about the ETF. Its collection of sectors, industries, and stocks provides a solid representation of the types of businesses that could stand to benefit from a pair of recent geopolitical developments.

According to a report by the International Energy Agency, global infrastructure investment is expected to reach $97 trillion by 2040, driven by the need for new and upgraded infrastructure to support growing populations and economic development. Additionally, the bipartisan infrastructure law introduced through the U.S. Congress has estimated $1.2 trillion in total funding targeted for infrastructure projects over the next 10 years. Together, these forecasts and dollar commitments provide a strong tailwind for the companies in this ETF, which can lead to increased revenue and profitability.

Weaknesses:

Infrastructure investing can be a very volatile endeavor, as seen by IFRA’s 41% drawdown back in 2020. This ETF has also not been through a full range of investment environments, as it only debuted in April of 2018. The fund’s standard deviation of around 27% over the past 3 years is an indication that IFRA should not be considered an old-fashioned Utility ETF, with low volatility, despite that sector being its largest.

Opportunities:

Besides the government spending initiatives in the United States and elsewhere that account for the projected long-term growth in infrastructure spending, IFRA may also benefit from a potential reversal of the long-standing outperformance of high-expectation growth stocks. This ETF owns no outright technology exposure, and if investors start to return to the types of sectors IFRA concentrates on, this can be a major driver of market outperformance in the years ahead. In addition, after years of a stock market driven by a small number of big tech companies, IFRA’s diversified allocation, with no stock even having a 1% portfolio weighting, could be a performance driver and source of risk reduction in the years ahead.

Threats:

IFRA’s heavy weighting towards small and mid-cap companies is a source of potential volatility, as would be the case with any ETF holding nearly 90% of its assets in companies considered midcap or smaller. In fact, the weighted average market cap of the stocks in this fund is under $6 billion.

Additionally, IFRA is, as described above, exposed to geopolitical risk. That naturally comes with the potential opportunities provided by government funding. Infrastructure firms operate in a highly-regulated environment.

The growing housing affordability crisis in the U.S. could also negatively impact the fortunes of IFRA, as it holds companies involved in the transportation and utilities sectors. For example, if the affordability crisis causes a decrease in housing demand, it could lead to a decrease in demand for transportation and utility services, which could negatively impact the returns of companies involved in these sectors.

Conclusions:

ETF Quality Opinion:

I like how IFRA is structured, and how it assesses the type of companies that could find themselves in the spotlight in a positive way, should the forecasts for U.S. infrastructure development and growth be realized over time. This is certainly a long-term-oriented opinion. However, it comes with a lot of opportunities for short-term gains too. As niche ETFs go, this is one I want to have on my watchlist going forward.

ETF Investment Opinion:

IFRA ETF gets a Hold rating from me for now. I am very bullish on this sector’s long-term growth, and that enthusiasm is offset in part by a potential intermediate-term peak in the ETF’s price after a 21% total return gain since the end of last September.