VPN Is A Solid Play To Wait Out The Recession Risk (NASDAQ:VPN)

5G Sunset Cell Tower: Cellular communications tower for mobile phone and video data transmission

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We target a 25% p.a. return on all our investments, but sometimes, you just want trusty exposures that can get you through difficult markets. The global economy is looking straight into the maw of stagflation that could chew the markets up, especially if the Fed proves to be impotent in controlling inflation. We think that the Data Center REITs & Digital Infrastructure ETF (NASDAQ:VPN), that we will just call VPN for short, might be an exposure for canny investors that are looking for relatively fool-proof exposures to hold rather than cash. Their digital infrastructure holdings are fairly priced, resilient and somewhat inflation-resistant offering a 2% semi-annual yield. While you won’t be making a fortune here, it can keep your cash safe.

Main Holdings

When looking at any ETF, it’s wise to give a quick look to the top holdings to understand the main anchors for the bucket’s return profile. In the case of VPN, returns are going to be driven by the following three constituting parts of the VPN ETF.

vpn holdings

Driving VPN Holdings (globalxetfs.com)

Internet Exchange

The economics of these stocks can be trusted. Let’s begin with Equinix (EQIX), which is a REIT that owns internet exchanges in which large networks can collocate and share data on a peering basis. The strength of Equinix’s economics lies in network effects and in the value proposition. It provides ISPs a way to share data between each other rather than paying transit fees to retrieve data from the internet backbone. These peering deals, since they are mutually beneficial, are also free between the peers, but they pay rent to Equinix to be present in their IXs. The larger the centers, the more deals that can be brokered and the more valuable the location, therefore the network effects. ISPs and major networks are the tenants, so they’re safe, and the need for IXs is driven by cloud, 5G and digitalisation which will require more volumes of data to be dealt with by networks.

Telco Infrastructure

The other two stocks featured heavily in VPN are companies that own key real estate to support telcos. Much like IXs, this real estate is supported by trends like 5G and consumer demands for more volumes of mobile data to be available to mobile customers. Moreover, this real estate is more rare, as it usually requires more complex permits, and in the case of Crown Castle (CCI) which owns telco infrastructure within cities, like those that you might see on rooftops or near train stations, which cannot be easily developed due to city bureaucracy. Both Crown Castle and American Tower (AMT) own this valuable infrastructure and lease it out to companies like AT&T (T) and Verizon (VZ), so about the highest quality customers you can have. Moreover, many of these lease agreements contain clauses that allow for adjustments to these long-term rental agreements, sometimes 10 or 20 years long, on an inflation-indexed basis. These stocks have also been languishing of late, especially AMT which had a bit of a retreat, despite the strength of their business and the enduring value of their assets. While not an extraordinary bargain, these quality assets have some rebound potential on account of that, and may benefit from future flights to quality.

Summing Up

The ETF is quite new, only trading since late 2020, but has now developed a distribution at a 2% yield based on the latest payments. However, investors should be aware that these payouts are semi-annual and not quarterly. Expense ratios are quite, but not very low at 0.5%, but a relatively low rate for being able to get quite a focused exposure on a particular vertical of the real estate market. Its exposures are quite inflation resistant and have economics from high quality assets that can meaningfully withstand turbulent forces in the economy and markets thanks to the strong and secularly growing end markets as well as the high quality tenants. Even going down the list to less major exposures, a primarily telco and internet infrastructure bet is really a safe one. We think that while not jaw dropping, a 2% yield represents a fair deal, and to park cash while waiting to see if there’s a recession, this is not a bad pick.

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