When selecting an investment product, thorough research is essential to ensure you understand precisely what you are purchasing. Names or descriptions of funds can often be misleading. Additionally, a fund’s strategy may evolve over time—a phenomenon known as style drift—as managers seek to capture trends that have recently outperformed.
One increasingly popular investment approach is thematic investing, where investors target a specific group of stocks expected to benefit from a unified trend. A notable example is infrastructure investing, with numerous ETF providers launching products to capture this theme.
Currently, there are 15 ETFs offering exposure to U.S. infrastructure, each defined by its own classification method. To simplify the analysis, let’s examine the two largest U.S. Infrastructure ETFs by fund size: the iShares U.S. Infrastructure ETF (Ticker: IFRA) and the Global X U.S. Infrastructure Development ETF (Ticker: PAVE).
ETF Sector Exposures
Both ETFs aim to provide targeted exposure to the infrastructure investment theme but do so in markedly different ways. IFRA’s holdings span five sectors, with concentrated exposure in Industrials, Materials, and Utilities, while the remainder is allocated to Energy and Consumer Discretionary.
By contrast, PAVE allocates 72% of its assets to Industrials alone, a figure that increases to 92% when Materials are included (Figure 1). This narrow focus highlights significant discrepancies between the two funds, even though both appear to target the same theme.
Why Such Discrepancies Exist
The answer lies in the index methodology, which varies significantly across providers. PAVE tracks the Indxx U.S. Infrastructure Development Index, which includes companies generating a “significant portion” of revenue from industries such as engineering services, raw materials, construction equipment, or industrial transportation.
Meanwhile, IFRA tracks the NYSE FactSet U.S. Infrastructure Index, which uses a broader definition. In addition to the industries included in PAVE’s index, IFRA also incorporates companies involved in energy transportation and utilities. While these differences may seem minor, they can have substantial effects on the underlying sector exposures and result in significant performance divergences.
Performance Comparison
The historical returns further illustrate these differences:
Over the past five years, PAVE has consistently outperformed IFRA, reflecting the differences in sector focus and index construction.
Key Takeaways for Investors
For individual investors, it is critical to scrutinize every ETF considered for a portfolio. Relying on fund names or thematic labels alone can be misleading. To ensure the targeted exposure and diversification you desire, always review the underlying holdings, sector allocations, and index methodology.
At Empirical, our approach is entirely data-driven. Fund selection is based on academic research and long-term evidence rather than temporary investment themes. If you are interested in learning more about our fund selection process, we encourage you to speak with an Empirical advisor or a member of our investment team.
