Our homes have become nodes in a multitude of networks that connect up the smart home amenities that we increasingly depend on – from energy to ecommerce, streaming and delivery services.
VanEck Smart Home UCITS ETF (CAVE) invests in these networks and in the real assets – or physical infrastructure – that physically connect them, such as cellphone towers, datacenters, warehouses and logistics.
Real assets are increasingly essential for our daily lives. They partially derive their value from the limited physical space available for them that limits their supply, especially in urban and more developed areas. Being part of the burgeoning smart home ecosystem boosts demand for these services, so reinforcing their potential value.
As such, they show how rapidly the smart home theme is evolving and branching out. The mix of technology and physical assets offers an investment universe that’s rich with opportunity for the active investment manager.
Broadband and Mobile’s High Barriers to Entry
The most obvious physical infrastructure connected to our homes is the broadband and mobile networks that enable communication (e.g. video calls) and entertainment services (e.g. streaming). Such services, however, are not possible without fiber networks, cell towers and data centers. Which is why VanEck Smart Home UCITS ETF (CAVE) invests in companies such as tower operator Cellnex Telecom and data center provider Equinix.
Moreover, cellphone towers have another characteristic sometimes present in real assets: efficient scale. When efficient scale of a type of real asset is reached in a certain area, it becomes less attractive for competitors to enter the market, as increased supply would lower the utilization rates of both parties. This creates an effective economic moat, or barrier to entry, around some real asset-based businesses.
In the case of cellphone towers, the potential number of towers per square kilometer is often limited. This is both because of a technological optimum number, and due to the fact that building a tower often requires permits, licenses, and compliance with specific zoning and safety regulations.
Companies that have reached efficient scale can turn that scale to their advantage in a range of ways. For example, since one tower can host multiple mobile networks, the company with the most towers in an area becomes an attractive partner for mobile operators seeking to quickly roll out their services in that area.
Logistics Develop Scale and Sustainability
Thanks to ecommerce, our homes have also become part of an advanced logistic network. Witness the continuous optimization of parcel delivery services, for instance by facilitating a return channel or by providing a more sustainable alternative to last-mile delivery. Real estate company Terreno, for example, brings ecommerce distribution centers closer to the end consumer, so improving supply chain resilience and enabling faster delivery.
Another example is GXO Logistics, which manages outsourced supply chains in its warehouses. For its ecommerce clients, GXO has also created an efficient return channel for unwanted or damaged goods, reducing their return costs.
Logistics company InPost, meanwhile, offers secure lockers that allow people to pick up and drop off parcels at their convenience. By eliminating the need for door-to-door journeys, and repeat deliveries, these lockers are more sustainable, limit the nuisance of delivery vans and take pressure off couriers.
Aside from providing a more convenient and sustainable form of last-mile delivery, InPost’s locker service reportedly increases footfall to the stores located in the area. The company’s research shows that 50% of its users visit nearby shops and 86% of them make a purchase.1
Moreover, similar to the cellphone tower example above, InPost benefits from efficient scale and platform effects. Once an InPost locker wall is in place, competitors are unlikely to install another locker wall next to it. In addition, the large network of locker walls turns InPost into an attractive logistics partner, enabling it to function as a platform.
Adding Functions to Our Homes
Our homes are also part of increasingly smart utility networks. As discussed in a previous blog, our homes are playing an active role in energy management and supply. While solar panels enable homes to produce their own energy, home batteries and electric cars can store that energy, and energy management systems can turn devices on and off. This is a necessary innovation, as renewable energy, generated by companies like NextEra Energy, accounts for a growing share of the energy mix.
As our home gains more functions, it also has to give up space. For instance, since the Covid-19 pandemic working from home has become common. In some cases, that means turning rooms previously used for storage into offices. By providing a broad variety of storage units close to home, companies such as Public Storage allow people to free up space in their homes for other uses.
The Result? More Opportunity and Potential Risk Diversification
Equity Market Risk: The prices of the securities in the ETF are subject to the risks associated with investing in the securities market, including general economic conditions and sudden and unpredictable drops in value. Thus, an investment in the Fund may lose money.
The continuously changing role of our home ensures that new types of real assets will emerge, leading to a steady supply of future investment opportunities. These assets highlight the richness of the smart home theme and illustrate the need for active management to capture its dynamism.
Important Disclosures
1 Source: https://www.cep-research.com/news/inpost-strengthens-uk-network-and-aims-for-10000-lockers-by-2024