The ability to invest in a basket containing all five data center REITs, plus domestic and international data center companies, cell towers, and related fiber infrastructure has not been available -- until recently.
In May 2018, Pacer Financial launched the Pacer Benchmark Data & Infrastructure Real Estate ETF (SRVR). While it has a long name, SRVR (think "server") simplifies investing in a basket of real estate equities focused on the growth of big data, AI, IoT, and future 5G infrastructure and related applications.
Pacer Benchmark ETF
In a nutshell, the SRVR ETF provides individual investors with an opportunity to allocate a small percentage of an overall portfolio to focus on real estate assets that benefit from the exponential growth of data and the infrastructure companies need to deal with it.
The SRVR ETF tracks a rules-based index licensed from Benchmark Investments. This index is rebalanced quarterly to ensure that no constituent company exceeds 15 percent, and the Top 5 holdings do not exceed 50 percent of the index valuation, Benchmark CEO and managing partner Kevin Kelly told Data Center Knowledge.
Source: Pacer March 31, 2019 presentation
Sean O’Hara, president of Pacer ETFs Distributors, told us that the SRVR ETF constituents are "receivers" being paid by customers such as wireless carriers (the "payers") that are expanding networks and preparing for future 5G/IoT deployments.
Why Diversification Is Challenging
It can be difficult to pick technology sector winners. A strategy of owning technology real estate is another way to gain exposure to the secular technology megatrends. Of course, most US households don't have seven-figure or larger fortunes to invest. Many Millennials are just beginning to save for retirement and often start with a relatively small bankroll.
Notably, some of the top holdings of the SRVR ETF, including Equinix, American Tower, Digital Realty, Crown Castle, and CoreSite Realty, are all trading above $100 per share. In fact, Equinix shares frequently trade over $450 per share, making it difficult for most retail investors to create a basket of publicly traded data-focused real estate companies.
According to Nasdaq.com, over 91 percent of EQIX common shares are owned by institutions, including ETF giants Vanguard, BlackRock, Cohen & Steers, and State Street.
Shares of the data center, infrastructure, and wireless towers are often owned in massive mutual funds and ETFs, where they are lumped in with the rest of the S&P 500, real estate sector, and technology funds.
Performance of the SRVR basket of stocks can be overshadowed by technology names such as Facebook, Apple, Amazon, Google (Alphabet), Netflix, Microsoft, and hundreds of other large market-cap companies from the ten other sectors which make up the S&P 500.
The YChart below illustrates how the data-focused SRVR ETF has tended to trade in step with the much larger REIT ETFs. Notably, it’s been in sync during the later innings of the secular bull market that began after the Great Recession.
YChart by Bill Stoller
My sense is that a strategy of owning a basket of names like the SRVR ETF might outperform other real estate sectors when the global economy eventually slows into a recession.
Source: Digital Realty Feb 2019 presentation
Traditional real estate sub-sectors like office, retail, and apartments typically struggle to maintain occupancy when unemployment rises and consumer spending contracts. Digital Realty was able to grow FFO per share through the Great Recession. Notably, many of the constituents of the Pacer Benchmark Data & Infrastructure Real Estate ETF were not publicly traded during the global financial crisis, so this strategy has not been battle-tested.
The SRVR ETF is relatively small and new, with an inception date of May 16, 2018. However, it is growing at a fast rate, as retail investors and financial advisors learn that this data-focused basket of equities is now available. O'Hara told us that the SRVR assets under management (AUM) at the end of 2018 were $5.8 million. Fast-forward to today and there is roughly 800,000 SRVR shares totaling $22.8 million. Overall, Pacer manages about a dozen funds with an aggregate $4.2 billion of AUM.
This article is not intended to be investment advice. The lack of a track record, small size of the SRVR ETF, and a 0.60 expense ratio may make this investment unsuitable for some investors. Always perform your own due diligence and consult with your investment and tax professionals prior to making decisions regarding any investment.