ProShares recently launched a new global infrastructure ETF (TOLZ).
ProShares claims it's the first pure-play infrastructure fund.
While not totally unique, TOLZ provides a new, interesting angle on the space and should be considered by income investors.
The investment thesis for infrastructure companies is hardly new. Basic services such as electric and water utilities, roads, ports, and communications are vital to any economy, developed and developing alike, growing or contracting. It's true that companies involved in the business of owning and operating such businesses can be capital intensive, and rarely fall into the fast-growing category, often rendering them boring to many investors. But on the flip side, they typically have relatively low competition due to high barriers to entry, experience no imminent threats to their business models, sometimes enjoy various government support and subsidies, and usually generate predictable cash flows and with them steady profits, which are often returned to the shareholders in the form of dividends.
In today's investment world dominated by the surge of ETFs, you can probably expect any reasonable investment thesis to be covered, especially if it's not new. Paraphrasing an early iTunes adage, there's an ETF for that. So when it comes to infrastructure, unsurprisingly, a number of ETF choices are available. There are a large number of MLP funds, popular for their high dividend yield, as well as utility funds regarded also as a defensive sector. There are several ETFs focused on engineering and construction companies that help build the infrastructure. Finally, several funds focus specifically on emerging markets infrastructure globally and separately in the largest EM markets including:
- iShares S&P Emerging Markets Infrastructure Index Fund (NASDAQ:EMIF),
- PowerShares Emerging Markets Infrastructure Portfolio (NYSEARCA:PXR),
- EGShares Brazil Infrastructure (NYSEARCA:BRXX),
- EGShares India Infrastructure (NYSEARCA:INXX),
- EGShares China Infrastructure (NYSEARCA:CHXX).
It is, therefore, with some incredulity that I have read ProShares' claim of launching "the first ETF providing pure-play exposure to infrastructure", the ProShares DJ Brookfield Global Infrastructure ETF (NYSEARCA:TOLZ), on March 27, 2014. However, the more research I have done, the more that claim seemed to hold up.
Under The Hood
TOLZ ETF tracks the Dow Jones Brookfield Global Infrastructure Composite index. According to the ProShares website, its pure-play approach focuses on companies whose assets include airports, toll roads [hence the ticker!], ports, communications, electricity distribution, oil and gas storage and transport, and water in both developed and emerging markets. To be included in the index, companies must derive more than 70% of their cash flows from infrastructure assets. The index excludes companies that supply services such as construction and engineering to the infrastructure industry.
It also claims that, since its inception in 2008, the index has outperformed the S&P 500 and the MSCI World Index with lower volatility. Now, that should probably grab investors' attention. Add to that a nice 3.88% yield paid quarterly and a relatively low for a global ETF 0.45% annual expense ratio, and you may just have all the ingredients for a worthy candidate for your income portfolio.
There are 121 constituents that are weighted "on a modified free-float adjusted market capitalization methodology". The top 10 holdings, as of March 31, 2014, account for 34% of the fund and are listed below:
National Grid PLC
American Tower Corp A
Enterprise Product Partners LP
Crown Castle Intl Corp
The Williams Companies Inc.
Kinder Morgan Inc.
The country and industry breakdown of the entire portfolio is shown below.
Portfolio Observations and Risks
After opening at $40 on March 27, TOLZ closed on April 4 at $40.81, for a nice 2.03% gain, and slightly ahead of the reported NAV of $40.79. It already has $4.08 million under management, and its average daily volume is 6,500 shares per day. While these numbers are low, understandably for a new ETF, they're sure to grow, reducing any potential liquidity risk. ProShares, the self-described "alternative ETF company" and a major player in the ETF space with 145 active funds, is also advertising aggressively in places such as Barron's in hopes of raising investor awareness.
The country allocation is well diversified, in my view. The US represents just about 50% of the portfolio; Britain and Canada add up to another 23%, and yet another 11% comes from Western Europe. There's a modest allocation to emerging markets highlighted by China and Hong Kong and a few stealth constituents registered in the tax heavens like Luxembourg, Jersey, and Cayman Islands, bringing the total EM share to the 7-8% range.
In terms of sector allocation, the lion's share is in oil & gas storage and transportation, electricity distribution, and MLPs - a whopping 69% combined. It's worth noting that the fourth largest sector - Communications - is represented primarily by American Tower (NYSE:AMT), Crown Castle (NYSE:CCI) and SBA Communications (NASDAQ:SBAC), all US wireless cell tower operators, either already converted or in the process of converting to a shareholder-friendly REIT structure.
The two closest competitors to TOLZ are iShares S&P Global Infrastructure Index Fund (NYSEARCA:IGF) and SPDR FTSE/Macquarie Global Infrastructure 100 ETF (NYSEARCA:GII). These portfolios are constructed with 87 and 85 holdings, respectively, and both allocate roughly 34% to top 10 holdings. Sector allocations are very similar and are concentrated in three sectors, with roughly 40% in utilities, 38% in industrials, and 18% in energy. The two ETFs have in fact the same top 10 holdings. Where TOLZ sets itself apart from these two is the sectors of communications, as well as roads, ports, and airports. To be fair, both GII and IGF allocate capital to the namesake canal operator GDF Suez (OTCPK:GDSZF), a holding one would expect to see in TOLZ as well, but would not find. They also both have the 5th largest allocation to a road operator Groupe Eurotunnel SA (OTC:GRPTF), classified as an industrial; it is also found in TOLZ.
In terms of assets, IGF has a formidable $811M AUM vs. GII's $96M, 0.48% expense ratio vs. 0.59%, and average daily volume of 135,000 shares vs. 24,000. The 1-year returns are 16.03% for IGF and 17.54% for GII, according to ETFdb.com, and the yields compare at 3.23% and 3.85%, respectively.
The TOLZ ETF provides an interesting new take on the definition of what an infrastructure company is, and a very compelling way to invest in them. I believe income-oriented and risk-averse investors should take a long, hard look at TOLZ to assess its suitability for their portfolios.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.