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Digital Infrastructure and Connectivity Overview

 

Digital Infrastructure and Connectivity UCITS ETF

  • Cisco Systems (CSCO) sees global internet traffic growing 3.7-fold between 2017 and 2022, and monthly internet traffic will rise to more than 350 exabytes per month, up from 96.0 EB per month in 2017[1].
  • By 2023, Cisco Systems sees 5.3 billion internet users that will have 3.6 networked devices each, up from 2.4 in 2018, just one more reason to expect that data traffic will continue to grow, taxing the digital infrastructure.

 

Digital infrastructure is the backbone of our increasingly digital lifestyle and the connected organization. In just six seconds in the US alone during 2019, 4.4 petabytes (4.4 million gigabytes) of internet data was transmitted an increase of 41% compared to 2018[2]- as people increasingly streamed, researched and searched, booked a ride, ordered food, shopped, shared photos and messaged. Pre-pandemic, Cisco Systems (CSCO) forecasted global internet traffic to grow by 3.7x between 2017 and 2022 as the number of users, the number of devices per user, and the amount of data per device all increase. 

As a result of the COVID-19 pandemic, demand that was expected to grow over the coming years instead appeared much more rapidly, exposing shortcomings and network deficiencies. This was summed up rather succinctly by Nokia’s (NOK) Sandy Motley President of Fixed Networks –

 

"Many customers had planned to grow their network by 30% to 40% over the next few years, assuming a similar growth in traffic, but Covid-19 brought in that traffic growth overnight[3].” 

 

As we have become increasingly aware during the pandemic, without a viable digital infrastructure our devices quickly become expensive paper weights.

As mobile network and other broadband operators add capacity to their existing networks, in the second half of 2020 the rollout of next generation broadband technologies, including 5G, accelerates. Recent 5G network announcements build on the 114 commercial networks that were deployed across the globe exiting the June 2020 quarter. Per data from TeleGeography[4], the number of 5G deployments is expected to double by the end of 2020. The deployment of these and other next generation networks are poised to accelerate data consumption and creation for existing applications. This will boost capital spending by network operators and enable a new class of connected devices and services as data speeds and network latency leapfrog many orders of magnitude, dramatically expanding the addressable market. 

By 2022, new and existing applications are expected to drive mobile data traffic alone to 930 exabytes per year, an 11,300% increase over 2012, which equates to all the movies ever made crossing global mobile networks every 5 minutes[5]. Current uses include streaming services, video communication, distance learning and telemedicine, all of which tax network capacity, while near-term drivers of mobile data traffic include the immersive gaming and virtual reality, Edge Computing and Internet of Things (IoT) applications in the home, hospitals, manufacturing and other environments. 5G and other disruptive broadband enabling technologies will foster new rich data applications that will spur additional data consumption, eventually resulting in network congestion that will require further infrastructure buildout even as next generation technologies, such as 6G are being developed to alleviate future network constraints. Already the South Korean government targets 2026 as the year in which it will begin its 6G trials with a stated goal of having that technology and those networks commercially available between 2028-2030.

Tematica Research’s Digital Infrastructure and Connectivity investment theme captures the virtuous cycle of rising data consumption /creation giving birth to new technologies and new applications that generate ever-rising demand for additional capacity. These digital backbone enablers run the gamut from infrastructure equipment and semiconductors to intellectual licensing and networking equipment that combine to form the connective data ecosystem we rely on today and those that will support the applications of tomorrow. This revolutionary theme captures the companies that enable the digital applications of both today and tomorrow that will redefine not only how people work, live and play, but how the increasingly connected and virtual organisation conducts its operations and serves customers. The theme is composed of six segments: data centres; data networks; digital connectivity; digital transmission; digital processing; and digital solutions and IP.

 

Sub-theme

Description

Data centres:

The connective hubs and backbone that allow for the communication, processing, backup, and distribution of data across vast digital networks. Example companies include Equinix (EQIX) and Digital Realty Trust (DLR).

Data networks:

The mobile, cable, and fiber networks that are the connective tissue of the digital infrastructure. Example companies include F5 Networks (FFIV) and ACI Worldwide (ACIW).

Digital connectivity:

Communication chips that enable cellular, WiFi, Bluetooth, and Near Field Communication (NFC) and other communications protocols that connect our wired and mobile devices to the digital infrastructure. Example companies include Qualcomm (QCOM) and Skyworks (SWKS).

Digital transmission:

The transceivers, multiplexers, servers, routers, fiber, card readers and receivers that comprise the connective hubs. Example companies include Cisco Systems (CSCO) and Ericsson (ERIC).

Digital processing:

Processor chips utilized in routers, network switches, and other digital infrastructure equipment. Example companies include NVIDIA (NVDA) and NXP Semiconductors (NXPI).

Digital services and intellectual property:

Platforms, essential services and other solutions that support digital infrastructure. This also includes R&D intensive companies and their licensing business models that develop cutting-edge digital and networking technologies. Example companies include Square (SQ), Cloudera (CLDR) and InterDigital (IDCC).

 

Everything from banks and hospitals to the military and utility systems increasingly rely on the internet and the infrastructure that enables it. Because of this, there is far greater reliance on the availability, stability and capacity of the global digital infrastructure. Deloitte estimates the average high-connectivity country stands to lose at least 1.9% of its daily GDP for each day all Internet services are shut down. For an average medium-level connectivity country, the loss is estimated at 1% of daily GDP, and for an average low-connectivity country, the loss is estimated at 0.4% of daily GDP. In the long-term, digital networks will be fast enough to enable artificial intelligence and connected drones and robots to serve as the communication backbone for autonomous vehicles that are navigating the highways and byways across the globe. The adoption of IoT and other digital disruptors will only increase the economic imperative of the ever-expanding digital infrastructure, resulting in rising demand for the digital infrastructure and connectivity products and services.

 

Background: Parallels between the US Highway System and Future Connectivity

We are in the midst of a digital infrastructure buildout that in many ways resembles that of the US Interstate Highway System. Were there roads before the US Highway System? Yes, but they were very limited. In the 1920s the Bureau of Public Roads provided funding for a system of paved two-lane interstate highways that were built by state highway agencies. When President Dwight D. Eisenhower signed the Federal-Aid Highway Act of 1956, the Interstate Highway System was launched to provide a high-speed, high-capacity system of highways that supported significantly accelerated economic growth.

 

"If we are ever to solve our mounting traffic problem, the whole interstate system must be authorized as one project, to be completed approximately within the specified time” – Dwight D. Eisenhower 1956

 

Flash forward to the current day and according to the ATA American Trucking Trends 2020, in 2019 trucks using the Interstate Highway System, as well as other freeways, highway and roads, “moved 67.7% of surface freight between the U.S. and Canada and 83.1% of cross-border trade with Mexico, for a total of $772 billion worth of goods crossing the borders.”[6] It’s not just trucks that drive that network of highways and byways, according to new data released by the US Federal Highway Administration. Drivers in cars, trucks, minivans and SUVs put a record 3.24 trillion miles on the nation's roads in 2018, up just over 9% from 2.97 trillion miles in 2010[7]. The bottom line is without the backbone of the Interstate Highway System, the US economy would not have enjoyed such powerful growth rates for decades. 

That network of highways, freeways, Interstate Highways and the bridges, tunnels and roads that connect them are the backbone of the American transportation system similar to the way the telephone, cable, fibre optic, undersea network connections, wireless networks and the chips, components and data centres that support  and enable them to form the global digital infrastructure. That backbone supported a global digital population of 4.57 billion active internet users as of July 2020[8], up from 3.95 billion in June 2018. 

 

For illustrative purposes only. 

Cisco Systems sees global internet traffic growing 3.7-fold between 2017 and 2022, and monthly internet traffic will rise to more than 350 exabytes per month, up from 96.0 EB per month in 2017. To put that into perspective, that 350 exabytes per month equates to 1 trillion DVDs per year, 88 billion DVDs per month, or 120 million DVDs per hour. By 2023, Cisco Systems sees 5.3 billion internet users that will have 3.6 networked devices each, up from 2.4 in 2018, which means there is a high probability data traffic will continue to grow further, taxing the digital infrastructure. Of that traffic, nearly 60% will be from WiFi, 21% wired, and more than 20% in the form of mobile data, up from 9% in 2017.

The drivers behind this expected global growth include increased consumption of content, shopping, communicating, and transacting across a greater number of devices; smartphones, tablets, PCs, TVs, wearables, smart speakers, cars, various home appliances in the kitchen and bathroom and other Internet of Things (IoT) applications  are available on wired and wireless networks.

 

Source: Cisco Systems For illustrative purposes only

 

5G and future network advancements are among the few cases that exemplify “build it and they will come.” 5G will make immersive experiences such as virtual reality (VR) and augmented reality (AR) possible with more uniform data speeds, lower latency, and lower data transmission costs. 5G will make reliable and protected remote control of mission-critical infrastructure or vehicles possible. It will also allow for a massive number of embedded sensors to be in nearly everything, providing seemingly endless opportunities to improve not just user experiences with technology but also our lives.

 

 

For illustrative purposes only Source: GSMA Intelligence

 

By 2025, according to GSMA Intelligence, almost three-quarters of global internet users will be mobile-based as global smartphone adoption will increase to 80% from 63% (3.3 billion people) in 2018. The build-out of existing networks will continue and the deployment of newer network and backhaul technologies will be imperative to handle the coming data explosion.

Hands down, the biggest category of data consumption will remain video. Video traffic exploded in the mid-2000s, and by 2016 it accounted for 12% of all data traffic. However, by mid-2010, Cisco noted that internet video had grown to over one-third of all consumer internet traffic as network coverage and data speeds improved, offering a more robust, more TV-like experience.

Global IP video traffic is expected by Cisco Systems to grow 4-fold from 2017 to 2022 reaching 325.4 exabytes per month by 2022, up from 91.3 EB per month in 2017, roughly 82% of all IP traffic by 2022.[9] 

There will be other categories as well driving that data traffic, such as the connected car, connected home, wearables, virtual assistants, and the Internet of Things (IoT). As computing and connectivity costs continue to fall in the coming years, while average bandwidth speeds increase, the combination will foster the development of new devices and consumer behaviours that will drive the creation and consumption of more data.

 

 

For illustrative purposes only Source: Statista 2020

 

Internet of Things

25 billion IoT devices globally expected in 2025

 

For illustrative purposes only Source: Statista 2020

All of that growing data traffic will test network capacity, in some cases straining existing networks with low bandwidth, high loss rate issues, network coverage vs. network capacity constraints as well as rough network handoffs.  These are some of the factors that lead to a dropped call, frozen screen or even worse “No Service” – an exceptionally frustrating experience when trying to get work done or when a streaming video drops just as you get to a movie's cliff-hanger. In a world in which people increasingly demand to be always connected, capacity will have to expand to keep up with expectations, and this is not limited just to wireless networks, as outages from cable and fibre networks aren’t exactly unheard of either. 

In today’s world of cord cutters, service issues and cost drive consumers to vote with their feet when it comes to internet connectivity. In some cases, network operators have little to no choice given that copper networks are well past their life expectancy and managing physically aging networks leads to frequent outages with expensive truck rolls. Usage issues also plague other service providers like wireless ISPs (WISPS), which was summed up rather nicely by Alex Philips of the WISP Association.

 

Digital Infrastructure and Connectivity UCITS ETF

With almost 5 billion people connected to the internet in 2020[10] (a majority of the world’s population), continuous access to digital information and communication is in growing demand.

This trend towards digitization and virtual communication will only accelerate as a larger share of commerce and human interaction continues to move online, particularly in critical areas such as banking, commerce, education, government services, entertainment and healthcare.

In 2020, Quikro has partnered with Tematica Research and HANetf to launch the Digital Infrastructure and Connectivity UCITS ETF (ticker:DIGI)

This revolutionary ETF captures the companies that enable the digital applications of today and those that will redefine how people work, live and play tomorrow.  It provides exposure to the explosive growth of the digital infrastructure virtuous cycle of expanding data, applications, and bandwidth that drives exponential network growth and development of new technologies. 

Our Technology ETF follows the Tematica BITA Digital Infrastructure Index developed by US-based Tematica Research comprising 80+ publicly listed global equities active within digital infrastructure sector.

Within the sphere of digital infrastructure, six major sub-sectors have been identified from the journey of data as it travels from storage to end-user. These are:

  • Data centres
  • Data networks
  • Digital connectivity
  • Digital transmission
  • Digital processing
  • Digital services and intellectual processing

 

Digital Infrastructure& Connectivity UCITS ETF provides investors with an opportunity to take a long-term view on all six of these sub-sectors at once. It is the first ETF of its kind to track digital infrastructure and connectivity in this way.  

The Technology ETF is domiciled under the Ireland UCITS regime with listings on the London Stock Exchange (Ticker: DIGI), Börse Frankfurt, and Borsa Italiana.

When you trade ETFs your capital is at risk.

 

 

Why Invest?

Exposure to digital megatrends

Global internet traffic is expected to grow 370% by 2022 according to Cisco Systems as the number of users, devices per user, and data per device all increase[11]. The roll-out of 5G, cloud, internet of things and other disruptive technologies will dramatically accelerate the trends of digitalisation and virtual communication. With that arises a growing need for digital infrastructure and connectivity to support the immense amount of data flowing between them. 

A unique investment proposition

Our Technology ETF offers investors access to a basket of companies that spans data centres, networking equipment and related hardware, corresponding essential services and IP focused companies.     

The unique, transparent, rules based Tematica BITA Digital Infrastructure and Connectivity Index (TBDIGI) is broader than other digital segments such as 5G or telemedicine. It seeks to identify those companies that will benefit from the explosive growth in data traffic across all digital segments as next-generation connective technologies roll out, resulting in ever-increasing demand for better digital infrastructure and connectivity solutions.

Potential returns

The performance of TBDIGI Index returned 40.87% over the last 12 months[12].  Past performance is no guarantee of future performance.

Risk of investing

As with all investments you should be fully aware of the risks of trading ETFs:

  • Thematic ETFs are exposed to a limited number of sectors and thus the investment will be concentrated and may experience high volatility
  • When you trade ETFs, your capital is fully at risk
  • Past performance is no guarantee of future performance
  • Exchange rate fluctuations can have both positive and negative effects on returns
  • Further risks are disclosed in the KIID and prospectus

 

For a detailed list of risks, please consult the KIID and prospectus

 

 

Backtested performance from 12/18/2009-08/30/2020.

Live performance from 08/31/2020- 9/30/2020.

Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product.

Source: Tematica. Data as of 30 September 2020

 

Trading information

 

Exchange  Bloomberg Code  RIC  ISIN  SEDOL  Currency TER
London Stock Exchange DIGI LN HADIGI.L  IE00BL643144 BJP4Y29 USD 0.69% 
London Stock Exchange PIGI LN PIGI.L  IE00BL643144 BJP4Y18 GBP 0.69%
Deutsche Boerse Xetra DIGI GY DIGI.DE IE00BL643144 BMW4W85 EUR 0.69%
Borsa Italiana DIGI IM DIGIT.M IE00BL643144 BMW4W74 EUR 0.69%

 

Download the DIGI Whitepaper here. 

 

About Quikro

Quikro Ltd is an investor in the financial services industry. Its purpose is to sponsor the launch and development of innovative exchange-traded funds (ETFs) listed primarily in Europe.  Quikro’s ETFs aim to outperform the broader market by employing novel alpha-seeking investment strategies structured around long-term defensible tailwinds whether economic, demographic, social or otherwise.  Quikro does not sponsor any ETFs unless they are unique and follow an investment thesis not easily accessible through other ETF providers. Quikro is mindful of the importance of sustainable, responsible investment and believes that underlying entities that take Environmental, Social and Corporate Governance (ESG) represent better long-term investments for its ETFs.

About Tematica

Tematica Research is an independent investment research firm focused on the development of thematic investment indices through a top-down (global macro) and bottom-up (industry and company fundamentals) approach.

This approach to thematic investing identifies the structural changes and pain points that arise from the intersection of evolving demographics, psychographics, technology, economics, and public policy. These changes and pain points result in pronounced secular market shifts that shape and impact behavior, forcing companies to make fundamental changes to their businesses to succeed.

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