Bright City Lights
The World Bank estimates that 4.4 billion inhabitants of cities generate over 80% global GDP. As 70% of the globe’s population could be living urban by 2050, there are many changes and opportunities ahead.
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Megatrends are large, global shifts that could have major consequences on society, the economy, and the environment over the long term. Urbanisation has been identified as one megatrend. The rapid growth of cities and the movement of people from rural areas to urban areas changes many aspects of life. Only ten cities had over 10 million people in 1990, while 43 of these megacities could exist by 2030.
Many point to the agglomeration effect. It theorises that one firm attracts another and eventually a network builds up in one area. A variety of industries leads to more specialised jobs and higher productivity. However, the scale and speed of this challenge comes with an increased demand for infrastructure and additional services. The World Bank expects that global infrastructure could require US$94 t of investment by 2040.
Starting and expanding a business is much easier when the basic building blocks are already in place. Of the 74 holdings in the iShares Global Infrastructure ETF ($IGF) almost 41% fall into the utilities segment, 38% in transportation and 20% in energy. The greatest exposure is companies such as toll road operator Transurban Group, electricity provider NextEra Energy Inc ($NEE) and energy firm Enbridge Inc ($ENB). These three each account for just over 5% of the total.
This ETF is focused on developed markets. Over 41% of holdings are in the U.S., 9.5% Canada and 9.4% Australia. As the sector is known for providing relative stability and being non-cyclical, it could become a refuge for investors concerned about an economic downturn. For others that expect funding from the Infrastructure Investment and Jobs Act and Inflation Reduction Act to drive growth in the U.S., the iShares U.S. Infrastructure ETF ($IFRA) could present a more targeted opportunity.
Another aspect is to consider the significant amounts of the spending that’s likely to occur in emerging markets. Urban populations in developed economies averaged around 79% of the total in 2021, while it was only 51% in their developing counterparts that have faster overall population growth rates. One investment option is the iShares Emerging Markets Infrastructure ETF ($EMIF), which tracks an index composed of 30 of the largest equities in the emerging markets infrastructure industry.
This ETF has a very similar breakdown across the transport, utility and energy as IGF, but it does come with a higher expense ratio of 0.60%, versus 0.40%. The holdings have a large exposure to China at 41%, then 20% in Brazil and Mexico at 15% of the total. Other assets are in Thailand, Qatar and South Korea. Those investors looking to capture growth in India and Africa might be better served with a product that targets the areas more generally like the SPDR Portfolio Emerging Markets ETF ($SPEM) or a country specific option.
With a variety of employment and cultural offerings, cities are sought after areas that come with a price premium for workers and businesses. Those looking for regular distributions might consider Real Estate Investment Trusts (REITs), which are companies that own, operate or finance income generating property assets. Thirty high yielding ones are combined in the Global X SuperDividend REIT ETF ($SRET), but some might be wary of having 33% of assets as mortgages and a 56% exposure to the U.S.
The appeal of urban areas is also linked to their status as innovation hubs. Looking to technology and taking more sustainable approaches can help balance limited resources with constant growth of cities. Exposure to companies involved with reducing the impacts of construction on the environment could be accessed through the Global X Green Building ETF ($GRNR). This ETF includes a 30% allocation to industrial firms that could benefit from demand for trends like increasing energy efficiency in buildings.
Today’s digital technologies and data can be used to create smart cities and help residents with more effective services. The SPDR® S&P Kensho Intelligent Structures ETF ($SIMS) includes businesses whose products and services drive innovation that enables the creation of intelligent infrastructure. It could also provide a starting point for investors to find interesting opportunities, such as Silicon Laboratories ($SLAB) that develops wireless technologies used in IoT platforms. However, these ETFs can’t capture all aspects of the urbanisation megatrend and many large infrastructure deals are often fully or partly owned by governments. The sector can bring stability to a portfolio and counterbalance more high growth stock. Investors should keep in mind that it’s not immune to inflationary pressures, with major schemes having a reputation for running over the budget and schedule. Like most infrastructure projects, these ETFs might only reveal their true value in the long term.