What Actually Goes Into Infrastructure Indexes?
You often hear about institutional allocators like pension funds and university endowments putting capital to work in infrastructure. But what exactly are they buying?
In most cases, these large investors negotiate private deals. That might mean buying a stake in a toll road concession, funding the construction of an airport, or holding preferred equity in a renewable energy project like wind turbines.
These investments can be structured through private equity, credit, or even long-term lease agreements. They often use a mix of preferred shares, senior secured debt, and revenue-linked instruments that don’t show up in public markets.
Retail investors, by contrast, have fewer direct options. Municipal revenue bonds are one route, particularly for domestic infrastructure tied to utilities or transport. But most of the capital flow happens through ETFs and mutual funds that track public infrastructure equities.
To meet this demand, index providers like MSCI and S&P Global have created infrastructure indexes that aim to capture the sector’s returns in a liquid, investable format. But these indexes can vary widely in construction.
Before you invest, it’s worth looking under the hood to see what you’re actually buying, and how well that aligns with your own infrastructure objectives.
Infrastructure indexes: GICS sector exposure
Infrastructure isn’t its own official sector under the Global Industry Classification Standard (GICS), the system developed by MSCI and S&P Dow Jones Indices to classify publicly traded companies.
GICS includes 11 headline sectors: information technology, healthcare, financials, consumer discretionary, consumer staples, energy, industrials, materials, utilities, communication services, and real estate.
Since infrastructure isn’t one of them, infrastructure indexes are typically constructed as a blend of companies pulled from multiple GICS sectors that index providers deem infrastructure-related.
For instance, the S&P Global Infrastructure Index leans heavily on industrials and utilities, with some exposure to energy companies as well.
The MSCI World Infrastructure Index follows a similar approach, overweighting utilities, energy, and transportation, while also adding telecom companies and so-called “social infrastructure” like healthcare facilities and education providers.
In practice, this means infrastructure indexes are less a concentrated theme and more a curated mix of different sectors. The precise makeup depends on the provider’s methodology, and no two indexes are exactly alike.
Infrastructure indexes: company-specific exposures
Looking at the top holdings of today’s infrastructure indexes reveals some meaningful gaps that investors should be aware of.
Take the S&P Global Infrastructure Index. Its top weights lean heavily toward airport operators, pipeline owners, and utility companies. These include names running regulated electric utilities, long-haul transmission lines, and regional gas distribution networks.
While that may seem like textbook infrastructure, most of these companies operate in a narrow band of sectors and follow traditional regulated or semi-regulated models.
The MSCI World Infrastructure Index has a slightly different mix. It tilts even harder toward U.S.-listed names and includes large-cap telecoms like AT&T, Verizon, and Deutsche Telekom.
Utilities also feature prominently, along with a couple of traditional pipeline companies. Still, even with these differences, the index follows a similar script: mostly large-cap, asset-heavy, and in capital-intensive regulated industries.
Infrastructure indexes: what's missing
For allocators looking for more modern, publicly-traded infrastructure exposure, we believe there are two clear gaps in both of these indexes.
First, data center REITs are missing. If telecom exposure is fair game for infrastructure classification, as MSCI clearly believes, then it’s hard to justify excluding the real estate investment trusts that own and operate the facilities enabling all of that bandwidth.
These REITs serve as the backbone of digital infrastructure. Companies like Equinix (EQIX) and Digital Realty (DLR) are absent from both index top holdings.
Second, master limited partnerships (MLPs) are also notably absent. While there are pipeline corporations like Enbridge and Williams in the mix, investors won’t find names like Enterprise Products Partners (EPD), Energy Transfer (ET), or MPLX (MPLX).
These entities differ from corporations in two key ways: they pass through nearly all earnings to investors and avoid corporate tax at the entity level. They also tend to offer higher yields and are a major part of the U.S. infrastructure landscape.
None of this is to say these indexes are poorly constructed. They serve a purpose and have made infrastructure investing more accessible to the masses. But they are far from complete.
For allocators treating infrastructure as a long-term asset class, we believe these benchmarks can serve as starting points, but not comprehensive exposure. Many of the most durable, tollbooth-like infrastructure assets are either underrepresented or left out altogether.
About Us
Jay D. Hatfield is CEO of Infrastructure Capital Advisors and is the lead portfolio manager of the Infrastructure Capital Bond Income ETF (NYSE: BNDS), InfraCap Small Cap Income ETF (NYSE: SCAP), InfraCap Equity Income Fund ETF (NYSE: ICAP), InfraCap MLP ETF (NYSE: AMZA), Virtus InfraCap U.S. Preferred Stock ETF (NYSE: PFFA), InfraCap REIT Preferred ETF (NYSE: PFFR) and private funds. Each month Infrastructure Capital hosts a monthly economic webinar; you can sign up to attend by visiting our website www.infracapfunds.com (important disclosures can also be found on the website). For a prospectus please reach out to us or visit the links above for each respective fund.
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