When asked which industries or sectors stand to benefit from the secular transitions to 5G, artificial intelligence, IoT, and big data, the go-to response from most market pundits or players might be areas like technology, telecommunications, automotive, and semiconductors. However, one underlooked area in my view is real estate, which provides much of the backbone needed for these transitions to take shape. And with a focus on technology infrastructure, the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR) is a leading play that combines the high growth of the technology industry with the stability and income of real estate.
In this piece, I will provide an overview of the fund and why its blend of real estate and technology makes it well-positioned to gain from long-term trends that favor investments in technology infrastructure. I will also highlight some of the potential risks of investing in SRVR, as well as look at the ETF from a technical perspective.
SRVR is a uniquely-positioned ETF that, while considered to be focused within the REIT industry, prioritizes investments in technology infrastructure. The rationale behind this fund centers around the belief that as technologies like 5G and artificial intelligence increasingly become integrated with our daily lives, considerable investments will be necessary in order to develop the infrastructure needed to put these technologies into effect. With this logic, many of the holdings in SRVR appear well-positioned to capitalize on the secular trends currently taking place within the technology industry, but with the relative safety and consistency often found in real estate.
Benchmark Investments, which serves as the index provider for SRVR, has identified four forward-looking trends that SRVR's components are expected to benefit from, and each holding within the ETF is selected with mind to these catalysts:
- The Internet of Things/5G
- Artificial Intelligence
- Blockchain/Distributed Ledgers (Private)
- Virtual Reality/Augmented Reality
(Source: Benchmark Investments Presentation)
(Source: Benchmark Investments Presentation)
With regards to the components of the ETF, there are a total of 18 different companies held in SRVR, with the top ten picks displayed in the chart below. The individual companies are largely centered around cell towers, data centers, and fiber optic networks. Additionally, a larger percentage of the weights in SRVR are distributed towards its top three holdings, in this case Equinix, Inc. (EQIX), American Tower Corporation (AMT), and Crown Castle International Corp. (CCI).
|Ticker Symbol||Company||Weight (%)|
|AMT||American Tower Corporation||13.74|
|CCI||Crown Castle International Corp.||13.17|
|ZAYO||Zayo Group Holdings, Inc.||5.33|
|SBAC||SBA Communications Corporation||5.07|
|OUT||Outfront Media Inc.||5.03|
|INXN||InterXion Holding N.V.||4.78|
|QTS||QTS Realty Trust, Inc.||4.63|
|COR||CoreSite Realty Corporation||4.40|
Apart from the strong returns that the ETF has provided so far this year, it also offers a superb 3.25% dividend, which far outweighs its expense ratio of roughly 0.6%. Overall, SRVR delivers a quality mix of growth and income, and its prioritization of the tech side of the real estate industry enables it to take advantage of the technological trends and investments that are expected to take shape over the coming years and decades.
The Case For Technology Infrastructure
With the "Future Four Horsemen" highlighted above, I'll note again that the rollout and establishment of these secular trends will require significant investments into technological infrastructure. The cell towers, data centers, and fiber optic networks provided by many of the companies in SRVR are where much of these investments will go in the growing shifts towards 5G, big data, and artificial intelligence, among other things.
From a telecommunications perspective, as providers like Verizon (VZ) and AT&T (T) compete to expand their 5G networks and presences, investment and demand for the towers, small cells, and fiber offered by companies like American Tower and Crown Castle International are only expected to grow from here. In fact, a report from Greensill estimates that $2.7 trillion is expected to be spent on 5G by the end of 2020 alone, with $1 trillion of this amount going towards infrastructure investments and network rollouts.
Similarly, the amount of data that is generated and consumed as technology is becoming integrated with our daily lives is growing at an exponential pace. The data centers provided by companies like Equinix and Digital Realty Trust (DLR), another one of the 18 companies held within the SRVR ETF, are expected to be a major focus of technology infrastructure investment, as companies and governments will need such locations to house and process rapidly growing amounts of data.
Another reason that SRVR sticks out to me is its distinct position within this ongoing technology revolution. When investors discuss secular trends like 5G and big data, the typical players that get brought up include companies like Verizon, Apple (AAPL), Intel (INTC), Amazon (AMZN), Qualcomm (QCOM), and Xilinx (XLNX). But much less discussed are the companies that work quietly in the background, the ones that provide the infrastructure, real estate, and resources necessary for these trends to be able to exist in the first place. Many of the players in SRVR benefit similarly to technology companies but without the same level of coverage or attention that the flashy tech and chip names receive, especially from a regulatory or trade perspective.
The Low Risk Of Real Estate, And The High Reward Of Technology
Real estate companies have been prime beneficiaries of the sharp declines seen in interest rates so far this year. Since REITs are usually viewed as bond proxies, these types of companies tend to benefit in low interest rate environments due to their high dividend yields and ability to provide relatively low-risk income. Additionally, real estate is seen as a safe haven in times of elevated uncertainty due to the sector's reputation for recurring revenues and stable income streams, and the current market environment has been one such example of this. The 3.25% yield currently paid out by SRVR serves as a quality source of income on top of the market-beating price appreciation of the ETF itself.
And it hasn't received much attention so far this year, but real estate is actually the second-best performing sector in the S&P for 2019. It narrowly trails technology, but the sector's returns have been less volatile, and it has managed to outperform and make new highs throughout much of the most recent market correction. That's because while real estate has been aided by a combination of falling rates and investors' search for yield, since the start of May the technology sector has been plagued with fears of an escalating trade war, and more recently of growing regulation. As a whole, SRVR offers a great opportunity to gain exposure to the growth and expansion of technology, but without much of the regulatory overhang, tariff exposure, and relative volatility faced by companies like Apple, Amazon, and Intel.
Despite my positive stance on SRVR, there are still a couple of risks to consider for this ETF. For one, the fund does tend to feature slightly higher levels of volatility than traditional real estate-focused investments, primarily due to its association with the technology sector. Additionally, since REITs tend to share a negative correlation with interest rates, the ETF could stand to underperform if rates, which have been beaten down as of late, experience some sort of a reversion to the mean.
On another note, it should be added that valuations in the real estate sector are experiencing somewhat of a high. The top three components of SRVR (Equinix, American Tower, and Crown Castle International), for example, trade at PE ratios of 96.08, 70.12, and 86.13, respectively. Granted, it's not often that REITs fall within the cheap end of the market. Many of these companies have a habit of reinvesting profits back into their businesses, and are usually assigned higher valuations by default due to the stability of their revenue and income streams. But safety is becoming increasingly expensive in this market environment, and this may possibly hamper returns going forward, especially if interest rates begin to rise again.
Finally, due to the current economic and trade-related climate, it's possible that heightened volatility and uncertainty could result in a lack of continued investment into technology infrastructure and real estate, which could hurt the components of the SRVR ETF. However, it's also possible that the opposite could be the case and that the argument could go both ways; considering that a good amount of the bad blood between the US and China centers around 5G and technological expansion, this ETF could also serve as a good way to play the potential for government-backed investments into technology infrastructure.
Observing the relative performance of SRVR in comparison with a number of market and sector benchmarks, the ETF has done well when it comes to delivering returns. SRVR has strongly outperformed the S&P 500 so far YTD, as well as the Real Estate (XLRE) and Technology (XLK) Select Sector SPDR ETFs. While SRVR largely traded in tandem with these benchmarks for much of the first half of this year, it's safe to say that its relative outperformance has come from the downside, where technology has been somewhat of a laggard.
From a technical point of view the chart still looks strong, especially in comparison to major indices like the S&P. I would be a bit wary considering that the current uptrend in SRVR appears to be weakening, but overall the ETF has held up very nicely, and the strong relative performance keeps me enthusiastic for its prospects going forward.
As an ETF that has carved out a niche for itself within the field of technology infrastructure, SRVR looks poised to capitalize on accelerating trends that favor investments in the cell towers, data centers, and fiber optic networks provided by many of its components. I like that the fund offers good exposure to the growth of the technology industry, but with the lower risk and volatility inherent in real estate, not to mention a 3.25% dividend yield. And while SRVR is not risk-free when considering factors such as high valuation levels and the possibility of a rally in interest rates, its unique positioning and strong relative performance lead me to believe in SRVR's viability as a good long-term bet.
Disclosure: I am/we are long AMZN, INTC, VZ. 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.