Bringing Some Glamour To Infrastructure ETFs

Legacy infrastructure exchange traded funds do fill some holes when it comes to targeting exposure to this investment, but these funds aren't perfect. While some old school infrastructure funds provide added income and yield, some of these products have flaws.

Those flaws include often high concentrations in the energy, telecommunications and utilities sectors. With those sector exposures, some traditional infrastructure ETFs are vulnerable to rising interest rates, lower oil prices or both scenarios.

What To Know

As investors' demands for more complete and unique infrastructure vehicles grows, some ETF issuers are meeting that demand. Consider the SPDR Kensho Intelligent Structures ETF XKII, which debuted in December.

XKII follows the Kensho Intelligent Infrastructure Index, benchmark “designed to capture companies whose products and services are driving innovation behind intelligent infrastructure, which includes the areas of smart building infrastructure, smart power grids, intelligent transportation infrastructure, and intelligent water infrastructure,” according to State Street Global Advisors (SSgA).

In other words, XKII is a next-generation idea for an investment theme that's often seen as prosaic and not viewed as a growth play.

Why It's Important

While the need for better bridges, roads, highways and railways in the U.S. and abroad is well-documented, as is the expected uptick in spending on such projects, infrastructure needs go far beyond the obvious.

“Infrastructure is evolving far beyond the traditional roads, bridges, and tunnels of yesterday,” said SSgA in a recent note. “Intelligent, adaptive and connected infrastructure of tomorrow will support increasing urbanization, expanding populations and the challenges of climate change. For instance, a report by Siemens explains how, in a world run by intelligent infrastructure, smart buildings and the smart grid would cooperate seamlessly to optimize energy consumption.”

At the sector level, XKII dramatically differs from standard infrastructure ETFs. Approximately 45 percent of XKII components are classified as technology companies and over a third dwell in the industrial sector. The ETF features no direct exposure to the slow-growth, rate-sensitive utilities sector.

What's Next

Companies involved with building smart buildings, grids and related fare, including those held by XKII, are driving the new wave of infrastructure investing opportunities.

“Intelligent, adaptive and connected infrastructure of tomorrow will support increasing urbanization, expanding populations and the challenges of climate change,” said SSgA. “For instance, a report by Siemens explains how, in a world run by intelligent infrastructure, smart buildings and the smart grid would cooperate seamlessly to optimize energy consumption.”

XKII is slightly higher this year, outperforming the S&P Global Infrastructure Index, which is down more than 2 percent.

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