Last week, I moderated two panels on real assets and infrastructure for completely different sets of panelists and audiences. Despite the differences, there were many similarities among the two panels. It inspired me to write up some brief takeaways on real assets — an area that is often underappreciated — and how you can access these investments through ETFs. Here are my biggest takeaways based on my own analysis of the panel discussions.
The first panel was at the Active Investment Company Alliance (AICA) 2024 Fall Roundtable and covered real assets (including gold and the adjacent gold mining sector), REITs, and infrastructure. Panelists were from Kayne Anderson, abrdn, Merk Investments, and Brookfield.
The second panel was at the ALTSTX conference and covered infrastructure and clean energy investments. Panelists were from EIP Investments, Greenbacker Capital, and Frontier Investment Management Company.
Real Assets Are Very Broad
How do we actually think about real assets? Like many investment concepts, it’s a broad idea. It has to do with a few categories of investments that don’t really relate to each other.
- Commodities: gold, precious metals, oil, natural gas, agricultural products like corn and wheat
- Infrastructure: pipelines, roads, powerlines
- Real estate: commonly found in the form of REITs, which include office, residential, logistics, and data centers
Even within these categories, there are many nuances. It’s sometimes difficult to think of these categories as one asset class. The main thing to remember is the word real. Real assets are tangible. You can see and touch gold, roads, and buildings. These are also typically seen as inflation hedges and can provide real return.
One of the largest real asset ETFs is the VanEck Inflation Allocation ETF (RAAX ), which has been up 16.5% YTD through November 19. This is a fund-of-funds that holds inflation fighting real asset ETFs like the VanEck Merk Gold Shares (OUNZ ), the VanEck Commodity Strategy ETF (PIT ), the iShares Residential and Multisector Real Estate ETF (REZ ), and the Global X US Infrastructure Development ETF (PAVE ).
Many Infrastructure Policies Appeal to Both Political Parties
Any time that there is an administration change, investors grow nervous over disruption that could affect their investments. On the infrastructure side, much of this concern has revolved around the clean energy transition. It is not likely that Trump would repeal the Inflation Reduction Act (which actually has some Republican support due to the majority of investments falling in red states). And some tax credits which have contributed to growth in the solar and wind energy industries have also been largely bipartisan.
With post-election jitters and investors straying away from ESG-related themes, clean energy ETFs have suffered. But over the long-term, with the Inflation Reduction Act expected to continue, clean energy should continue to be resilient beyond 2024. The iShares Global Clean Energy ETF (ICLN ) provides exposure to companies that produce energy from solar, wind, and other renewable sources. There are also more focused ETFs like the Invesco Solar ETF (TAN ) and the First Trust Global Wind Energy ETF (FAN ). ICLN, TAN, and FAN are down 22.5%, 36.3%, and 5.3%, respectively, with significant outflows.
Infrastructure Will Support the Growing Demand for AI
By now we’ve accepted that artificial intelligence (AI) is very real. The big question is no longer, “Is AI going to be the next disruptor?” The question now is, “How do we support AI as the next big disruptor?” The data centers required for AI functions require lots of electricity demand, which will be supported by the utilities. The extent of that has been highly debated but I’ve heard estimates that an AI search requires 5–10x more energy than a simple Google search. While traditionally a less exciting sector, the utilities sector has received a lot of attention this year. There have even been filings for thematic ETFs focused on electrification by Global X ETFs and Tema ETFs. Within the utiltiies sector, stocks like Constellation Energy (CEG) are up over 100% YTD after the company announced a nuclear energy deal with Microsoft (MSFT). The Utilities Select Sector SPDR Fund (XLU) has been up 27.0% YTD, while actively managed Virtus Reaves Utilities ETF (UTES ) has been up 51.9% YTD.
Everything Is an Alternative Investment
I’m taking this from one of the keynote speakers from CAIA (Chartered Alternative Investment Analyst Association) — but the phrase everything is an alternative investment caught my eye. We have come a long way from the traditional 60/40 portfolio. How do we think about infrastructure in the context of a broader portfolio? It can be difficult to think about because many investors access real assets through equities. Is it part of an equity allocation or part of an alternatives allocation? Many infrastructure PMs believe that real assets should be considered a separate sleeve apart from equities and fixed income. For many investors, a real asset allocation of 5–10% will serve as a diversifier and return enhancer.
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