The golden rules of thematic investing and the timely US infrastructure theme were the topics discussed at ETF Stream’s webinar with Global X.
The webinar, titled Biden’s infrastructure plan: How investors can benefit from the bill, started by looking at the best way to construct thematic products and where they might fit within an investor’s portfolio.
Morgane Delledonne, director of research at Global X, said the thematic investing industry has benefitted from investors looking for differentiation and non-correlation with the core components of their portfolios, particularly by targeting disruptive companies with a long-term horizon.
Explaining how Global X builds its products, Delledonne said: “We start by conviction – long term changes driven by structural and technological developments, changing demographics and changes in the physical environment.
“We focus on questions such as ‘what is the addressable market?’, ‘are there products already on the market?’ and ‘what are the pure-play companies addressing each theme?’.”
Making the distinction between trends that are cyclical and those that are structural, she added: “It is important to create a thematic ETF that is not only relevant today but also in the medium and long-term.”
Looking at the specifics of constructing a thematic basket, Delledonne continued, stating it is important to find the right balance between theme purity, diversity and liquidity.
While being exposed to exciting, early-stage companies creates scope for a long run of growth, necessary precautions need to be taken, such as making sure potential constituents meet certain size and liquidity constraints.
At the other end of the scale, it can be tempting to cover all bases with a broad thematic basket, however, Delledonne warned over-diversification can lead to holding companies with large overlaps in other themes and core exposures.
This is at odds with the use case for thematics which create value add by addressing specific niches of companies deriving meaningful revenues from the desired theme.
“Having a satellite holding in thematics in each sector might be a good way to hedge your portfolio and avoid being disrupted,” Delledonne argued.
The rationale for US infrastructure exposure
Looking to take advantage of both cyclical – spending by a new president – and structural – digital and green infrastructure – trends, Global X brought one of its popular US-listed ETFs over to the European market earlier this month with the launch of the Global X U.S. Infrastructure Development UCITS ETF (PAVE).
“At the moment the US has inadequate infrastructure,” Delledonne noted. “The American Society of Civil Engineers graded the country’s infrastructure with a C- because of its deteriorating roads, waterways and seaports.”
This creates a unique opportunity for investors, as companies in infrastructure benefit from rolling, cyclical forces and idiosyncratic, long-term developments.
On the one hand, infrastructure assets naturally depreciate over time and policymakers have little choice but to spend on maintenance and modernisation, especially as demographic forces such as continued urbanisation and population growth continue.
This, in turn, benefits a wide array of infrastructure subindustries, including construction, construction equipment and transportation, water management and the companies providing resources such as concrete, copper, steel, aluminium and lithium.
On the other hand, US infrastructure is receiving a boost from the confluence of long-term societal shifts, including the need to decarbonise the economy and expand the capacity, sophistication and security of its digital infrastructure.
Directly benefitting from this are renewable energy utilities, electric vehicle charging point providers, cybersecurity companies, those involved in the Internet of Things (IoT), cloud computing and digital real estate.
The half-trillion-dollar promise
In ordinary times these factors might form a strong investment rationale, however, their appeal has been amplified by Joe Biden’s recently passed $1trn infrastructure bill, which the president himself described as a “monumental step forward” and a “once-in-a-generation” spending measure.
In practice, the new legislation will see $550bn spent in the next eight years on upgrading highways, roads and bridges, modernising city transit systems and railways, high-speed internet infrastructure, clean drinking water and electric vehicle charging points.
Part of the commitments includes $65bn of expenditure on broadband infrastructure and grids, and $7.5bn for plug-in electric vehicle chargers, which Delledonne described as “a huge tailwind for the adoption of EVs in the US”.
Speaking on the infrastructure bill as a whole, she said: “It is massive and will boost spending in the short term, but also produces a backdrop which is perfect for the adoption of other technologies going forwards.”
Delledonne then told viewers using PAVE to target the US infrastructure growth story also carries unique advantages.
For instance, opting for traditional sector ETFs instead might mean investors only capture a small portion of the infrastructure value chain.
Meanwhile, investing in most infrastructure funds tends to have one of two downfalls, Delledonne argued. Either a fund weights to companies that invest heavily in infrastructure, such as NextEra, without receiving many benefits from infrastructure spending, or they have a tendency to not focus exclusively on the US, meaning they are not entirely focused on the country with the highest expenditure on maintaining and modernising its infrastructure.
Delledonne explained PAVE’s US focus is particularly relevant considering the anticipated arrival of the reconciliation bill, which if enacted could see another $1.7trn funnelled towards climate change and social policy.
She added: “For ESG-minded investors, investing in infrastructure makes sense, especially when you look at the way the theme touches on UN’s SDGs.”
Not only is Biden’s infrastructure policy directly supporting the green transition but products such as PAVE address goals six, nine and 11 of the Sustainable Development Goals, which touch on clean water and sanitation; industry, innovation and infrastructure; and sustainable cities and communities.
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