IFRA: A Primer On This Mid-Cap Heavy US Infrastructure ETF (BATS:IFRA)

Introduction to the iShares US Infrastructure ETF

The iShares US Infrastructure ETF (IFRA), which is backed by Blackrock (under its brand of ETFs-iShares), is a $4.25B product (in terms of assets under management) that has been in existence since April 2018. IFRA, which is priced at an expense ratio of 0.3%, pays dividends on a quarterly basis, with the annualized figure amounting to 1.57%.

How Is IFRA Built?

IFRA’s intention is to focus on stocks that stand to benefit from a boost in domestic (the US) infrastructure activities, and it goes about fulfilling its goal by tracking an index that is maintained by a third party called ICE Data Indices [IDI]. The index in question is the NYSE FactSet U.S. Infrastructure Index [NFUII], and it is constructed using a methodology developed by Fact Set (a global financial data comp).

NFUII which is reconstituted every March requires any potential constituent (which needs to be listed on the NYSE, NYSE American or the Nasdaq) to have a minimum market-cap of $300M (as well as an average 3-month daily traded value of $1M). Then, from this pack, all stocks that generate 50% or more of their revenue from infrastructure-related industries are considered. Basically, the goal is to procure either infrastructure enablers or infrastructure asset owners and operators, who generate 50% or more of their annual revenue from the US. Once the stocks are gathered (over 160 in total), they are then assigned equal weights, which get rebalanced four times per year.

What Are The Key Characteristics Of IFRA’s Portfolio?

We know that IFRA focuses on infrastructure enablers and infrastructure asset owners/operators, but from which sectors (as per the traditional definitions of the Global Industry Classification Standards, or GICS) are they procured? Well, two sectors in particular (industrials and utilities) dominate with an aggregate weight of over 75% of the entire portfolio. The rest of the portfolio comes from the materials sector, the energy sector, and the discretionary sector, with the latter contributing an insignificant stake of less than 0.5%.

Unlike a lot of products that track market-cap weighted indices (which ends up making them giant and large-cap heavy), IFRA’s target index follows an equally weighted policy. As a result, note that it isn’t giant or large-caps but the mid-cap bracket which dominates this portfolio with a 56% stake. Micro-cap exposure of around 2% is understandably low, as ICE Data Indices does not consider stocks with a free-float market-cap of less than $300M (at the time of construction).

Stylistically as well, it’s the mid-cap blended names which dominate this portfolio with an aggregate stake of one-third. For the uninitiated, blended stocks combine the best of both the value and growth style stocks (typically those with stable business models and high dividend payouts, in addition to strong growth prospects in terms of sales/earnings).

Who Is IFRA For?

IFRA represents a cost-effective vehicle (an expense ratio of 0.3% which is the lowest amongst pure play infrastructure ETFs, and 20bps lower than the ETF median of 0.5%) for those who want well-balanced and comprehensive coverage to stocks across the US infrastructure value chain. This portfolio not only includes traditional infrastructure stocks such as utilities and transportation plays (which tend to benefit from stable cash flows and high barriers to entry), but also those (like construction & engineering service firms, machinery and material providers) that are more cyclically themed, and are also favorably exposed to a growing impetus in US infrastructure spending appetite, are seeing a surge in backlogs. This balance between the two pockets, makes IFRA well positioned to thrive in both an upswing and a downswing of the broader economy.

IFRA would also be suitable for those who dislike the overcrowded large and giant-cap space (most ETFs follow market-cap weighted indices which end up focusing largely on these market-cap categories), and are more comfortable tilting towards the mid-cap space (which typically offers better growth prospects than giant and large-caps, and are also less volatile than small-caps).

What Are The Risks Associated With IFRA?

The stocks of IFRA are likely to be very sensitive to the shifting hues of Federal fiscal policy, particularly in light of the burdensome debt burden that the US government faces (government debt to GDP has been above 120% for multiple years, since the onset of the pandemic); if the ruling governments choose to turn more parsimonious and more fiscally responsible, or divert resources away from infrastructure projects to other areas of the economy, the stocks of IFRA could be adversely impacted. Needless to say, this is a cohort of stocks whose prospects are closely linked to the political climate of the country.

IFRA is a passively managed product, whose value is primarily derived from how effectively it tracks the NFUII. Rather than resorting to full replication, IFRA seeks to mirror the performance of NFUII through a more cost-efficient process known as ‘representative sampling’, where the former only owns a sample of stocks that in total have the same qualities as the latter. While IFRA may score on the efficiency front, it loses out on tracking capabilities (tracking errors are wider than those experienced by the median ETF), which appear to have gotten worse over the last three years and the last year alone.

Investors who own S&P 500-heavy portfolios, are unlikely to find IFRA as a apt diversifier, as it’s sensitivity to the movements of the US benchmark, are almost close to 1x. Put simply, for every 1% move in the S&P 500 (be it to the upside or downside), one can typically expect IFRA to move by around 0.9%.

The margins of businesses involved in the infrastructure space, also tend to be keenly impacted by commodity price volatility, tariff effects, and labor shortages.

Peers of IFRA

Two close peers of IFRA are the Global X U.S. Infrastructure Development ETF (PAVE), and the iShares Global Infrastructure ETF (IGF).

IGF, differs from the other two in that it is the only one which provides exposure to infrastructure stories beyond just America (US exposure which is still the largest is at 36%). This ETF, which is the oldest out of the lot, also offers the most concentrated infrastructure exposure (it only covers 78 stocks), with a heavy tilt towards transportation stocks (the other two are more spread out and tilt more towards the industrial sector. It also stands out for its high-yield (relative to the other two), and a predilection towards large-caps (as opposed to mid-caps).

PAVE, which is backed by Global X (unlike the other two), is a very industrial heavy portfolio (72% of the holdings). It is also the least cost efficient (an expense ratio of 0.47%), and also the least lucrative from a yield angle (not even half the yield of IFRA, which in turn lags IGF). Note that both alternatives to IFRA distribute less frequently than our ETF in focus. Out of the three IFRA appears to be the least portfolio prone to change (annual churn of only 10%)

Summary

IFRA represents a cost-efficient ETF for those who want access to a pool of stocks from across the US infrastructure value chain that could thrive in expansionary as well as defensive macro conditions. IFRA, which tilts more towards mid-caps, still moves in close tandem with the S&P 500 and may not represent a great portfolio diversifier.

This article answers three main questions about IFRA:

1. What are the key features of IFRA’s portfolio?
2. What type of investor is IFRA suitable for, and what are the risks associated with it?
3. Are there other passive ETF alternatives that offer exposure to infrastructure stocks?