Vanguard vs VanEck: Two Infrastructure ETFs (2024)

Last week I had a look at why you might consider investing in infrastructure. This week, I begin looking at some options. You can invest in domestic or global securities, shares or bonds, listed or unlisted funds, ETFs or managed funds. Where to start?

ETFs seem the logical place, with low minimum amounts to invest, low fees and good diversification. Let’s start with domestic ETFs. Two I’ve chosen to look at are the Vanguard Global Infrastructure Index ETF (ASX:VBLD) and the VanEck FTSE Global Infrastructure (Hedged) ETF (ASX:IFRA).

Here is a summary of key stats.

Interestingly, both ETFs track virtually the same index, the FTSE Developed Core Infrastructure Index. The difference is that one chooses to part hedge to the Australian dollar and the other doesn’t hedge at all.

This makes direct comparison difficult, particularly given the AUD has declined against the USD by circa 7 per cent over the last 12 months. We get a bit of a feel for the movement from returns show in the table above. While VBLD very closely tracks its index, over the last year its return has been 12.52 per cent, while the index return was 3.9 per cent.

Should the AUD go on an upswing compared to the USD, returns could be significantly worse than the index.

Here are the top 10 constituents in the index. The top three -- NextEra Energy, Union Pacific and American Tower -- are all domiciled in the US, making up circa 17 per cent of the index.

Vanguard Global Infrastructure Index ETF (ASX:VBLD)

This ETF seeks to track the return of the FTSE Developed Core Infrastructure Index (with net dividends reinvested), in Australian dollars. Importantly, while the fund invests in a range of international companies in various currencies, it does not hedge them to the Australian dollar, so returns comprise both performance of the underlying investments and currency fluctuations. Distributions are made quarterly.

The fund closely tracks its index with almost 70 per cent invested in US shares, followed by 14.4 per cent in Canadian assets and 3.8 per cent in Japanese companies. A little over 2 per cent is invested in Australian companies.

More than a third of the fund is invested in conventional electricity, followed by railroads at 19.1 per cent, pipelines at 13.9 per cent and multi utilities at 10.8 per cent.

VBLD’s top three holdings mirror its index.

ETFs typically provide good transparency into their investments and Vanguard data is excellent. Characteristics of the fund compared to the benchmark are listed below.

From the data, we can see that the fund mostly invests in very large companies with a median market cap of $69.1 billion, that the price to earnings ratio is high at 23.8 times, as you would expect at this point in the cycle. Remember that infrastructure assets are highly sought after as a hedge against inflation and thus the price of the shares could be at a cyclical high.

Return on equity and the earnings growth rate are what I would expect at 10.1 and 7.6 per cent respectively.

VanEck FTSE Global Infrastructure (Hedged) ETF (ASX:IFRA)

VanEck management seem to have better oversight over its fund and imposes limits on constituents, whereas the Vanguard fund does not have any other filters but tracking the index.

VanEck state that only companies with 65 per cent of revenue attributable to infrastructure activities are included in their fund. This is an important distinction, especially if you want a purer pure play infrastructure investment. Further, each company is then capped to a limited value per sector:

• 50 per cent utilities
• 30 per cent transportation
• 20 per cent other

Investment per company is limited to 5 per cent, although I note the top two investments are slightly over the limit.

IFRA also aims to track its index, the FTSE Developed Core Infrastructure 50/50 Hedged into Australian Dollars Index. So, in essence the same index as VBLD but part hedged to smooth currency fluctuations. This would likely explain the difference in returns between the two ETFs as shown in the table above.

While, the two ETFs claim to track the same index, there are significant differences in the fund’s top holdings. IFRA’s top investment is Australian company Transurban with a 5.66 per cent allocation, followed by Atlantia SPA with 5.52 per cent and NextEra Energy (VBLD’s top holding) in third with 4.92 per cent. There are similarities but also differences in weightings.

This fund allocates around 70 per cent of its portfolio to Electric Utilities, Transportation Infrastructure and Multi- Utilities, a higher allocation compared to VBLD. It also has a lower allocation to US securities at 57.1 per cent but higher to Australian securities at 8.5 per cent.

VanEck provides a reasonable amount of data on underlying characteristics in the fund but less than Vanguard. IFRA average price/earning ratio is higher at 25.92 per cent and dividend yield is lower at 2.75 per cent. Price to book ratio is slightly lower at 2.23 times.

Note – this fund is included in the InvestSMART Conservative fund and has a 5 per cent portfolio weight.

Summary

At first glance these funds seem similar but digging deeper has revealed they are actually quite different. Depending on your risk appetite and views of the USD and Australian dollar relationship, you may prefer the riskier and better performing Vanguard VBLD fund. Double digit returns over the last 12 months are very attractive.

However, the VanEck ETF IFRA with its greater oversight, higher allocation to Australian investments and more consistent returns might suit your goals better.

While I normally don’t look at very short term returns of less than a year, it is interesting to note both funds and the index are showing negative returns. Are investors taking profits?

I am a big believer in having a long-term allocation to infrastructure in your portfolio, particularly if you are in or nearing retirement. Sector attributes naturally fit with a retiree wanting long term consistent income and some inflation protect.

The problem is that right now with inflation rising, they are highly sought-after assets. So, you are going to pay to get in on the action.

Next week I’ll look at some managed funds.

This note is for educational purposes and neither of these two ETFs are recommendations.