Among the many investment themes clients are likely curious about this year is infrastructure and it's easy to understand why that's the case.
Infrastructure has been the epicenter of political debate since the start of the year and while there's bipartisan support for President Biden's infrastructure proposal, final approval of that legislation is being hindered by highly partisan wrangling over another, significantly larger spending package.
Additionally, rising inflation is putting infrastructure investing in the spotlight. In traditional form, infrastructure investments are considered hard assets or those with leverage to that concept, making these ideas, usually anyway, ideal inflation-fighting vehicles.
However, not all infrastructure is of the roads, rails and shovel-ready variety. In fact, like so much else in financial markets and society at large, infrastructure is taking on an increasingly digital shade, indicating the Roundhill IO Digital Infrastructure ETF (NYSEARCA:BYTE) could be an interesting fund to discuss with clients.
BYTE, which tracks the IO Digital Infrastructure Index, debuted on Thursday. Rookie status aside, the fund focus on the increasingly relevant theme of digital infrastructure and it's one that could be appealing to tech-savvy clients in search of alternative assets with inflation-fighting potential.
“Digital infrastructure is comprised of the high-tech physical assets that support the efficient storage and transmission of data, powering the internet,” according to Roundhill Investments. “These assets include fixed-line, high-speed data transmission technology (such as fiber optic cable and certain 'last-mile' technologies that bring data to and from the end-user); data centers; mobile towers and related infrastructure; and other long-lived physical infrastructure assets.”
As advisors already know, many companies in the data center, industrial warehouse (prime examples of last mile firms) and mobile tower industries are classified as real estate stocks or real estate investment trusts (REITs) and while these companies usually don't yield as much as their traditional REIT peers, the real estate exposures in BYTE are growth avenues and have significantly outperformed old guard real estate benchmarks in recent years.
What makes digital infrastructure compelling is that, like some of the more hard infrastructure assets, there are varying usage cases. Translation: There's more versatility here than meets clients' eyes. For example, data centers are frequently viewed as derivative plays on cloud computing and rightfully so, but data centers intersect with myriad other disruptive technologies.
“Digital infrastructure growth is largely agnostic to what use cases are adopted, as long as those use cases require fast, ubiquitous access to data,” notes Roundhill. “Cloud, SaaS, online gaming, social media, remote work, streaming, AR/VR, and artificial intelligence are just a few of the technologies that are built on top of digital infrastructure.”
Data center stocks represent over 18% of BYTE's weight. Another area of allure, particularly for younger mobile device-savvy clients, is the new ETF's 23.3% allocation to mobile tower companies. On the surface, that's not a glamorous business, but those companies literally are the backbones of how we talk, text and consume entertainment and information from mobile devices. In other words, there's an attractive long-term investment thesis to be had in this industry.
“According to Cisco’s Annual Internet Report, by 2023 there will be more than 13 billion mobile devices in the world, of which 1.4 billion will be 5G capable, accounting for more than 10% of the world’s mobile devices and connections,” notes Roundhill.
BYTE Bottom Line
Not all new ETFs merit an immediate call to action, but BYTE is an example of one that just might. Obviously, it'll take sometime for this new fund to make its way onto advisor platforms, but Roundhill is adept at connecting with investors, particularly younger ones, so it's reasonable to surmise some clients will inquire about BYTE indicating advisors should be prepared.
In BYTE's case, age isn't relevant, but it's underlying investment thesis is and it's one that's being validated on a daily basis. Arguably, this fund concept is overdue because infrastructure investing needs some refreshing and BYTE modernizes this concept.
So while BYTE is a shiny new object in ETF terms, it's got the substance to backup its flash.