The timely opportunity in infrastructure ETFs

Oct 5th, 2021 | By | Category: Alternatives / Multi-Asset

By Chris Huemmer, Senior Investment Strategist, FlexShares ETFs.

Chris Huemmer, Senior Vice President and Senior Investment Strategist for FlexShares ETFs.

Chris Huemmer, Senior Investment Strategist for FlexShares ETFs.

As the US House of Representatives prepares to vote on a roughly $1 trillion infrastructure bill, investment opportunities in infrastructure have become front and center for many ETF investors.

The proposed legislation includes $550 billion in new funding on roads and bridges, water infrastructure, and the expansion of broadband access, among other projects.

With negotiations around the infrastructure bill predicted to go down to the wire, we believe it’s important for investors to fully understand the basics behind the infrastructure asset class. In this article, we take a deep dive on the infrastructure sector – what is it, what are the benefits, and how can investors access it?

Defining modern infrastructure

Investors often think of infrastructure only in terms of traditional projects like roads, bridges, energy assets, and water/waste management facilities. However, this definition has evolved and expanded over time alongside the public’s latest needs. Today, critical infrastructure includes newer technologies like cellular towers and broadband networks, as well as so-called “social infrastructure,” which includes healthcare facilities and privatized postal services around the globe. These modern components are key to the revitalization of infrastructure in the US, as well as in many other countries.

Investors may want to keep this broader view of qualifying assets in mind when seeking out infrastructure investment strategies, to both potentially maximize the investment opportunity and manage concentration risk. Traditional projects tend to be concentrated in sectors like energy, transportation and utilities, and related strategies may become overweight to those areas. However, by taking advantage of the full scope of infrastructure projects, diversification may be increased across sectors and revenue structures while potentially exposing investors to more growth opportunities.

In addition to diversifying the underlying assets, investors may also want to consider diversifying their infrastructure investments globally. As the world’s population grows, virtually every country faces pressure to upgrade existing infrastructure or launch new developments. Beyond the United States’ infrastructure package, we believe that this trend will continue to play out internationally and offer increased opportunities to mitigate regional risks tied to these location-specific assets.

Benefits of infrastructure strategies

We believe investing in global infrastructure may have several potential benefits in today’s market environment:

Income source: Many investors look to infrastructure investments as a source of income—which is particularly beneficial in today’s prolonged low interest rate environment. Like real estate, infrastructure historically tended to benefit from low interest rates, as they may result in lower costs and debt financing.

Inflation hedge: With inflationary expectations on the rise, investors may benefit from infrastructure’s potential to serve as a barricade against potential inflation.

The hardest hit sectors may be poised for the biggest recovery: At the onset of the pandemic, certain sectors of infrastructure—like air travel, seaports, rails, and pipelines—were hit particularly hard. As global economies reopen, our opinion is that these sectors may be poised to benefit most.

Potential diversification benefits: Due to the historically stable nature of infrastructure assets’ revenue streams and costs, listed infrastructure equities may often exhibit characteristics of both equity securities and debt instruments — offering the potential for the diversification benefits that come with differentiated returns.

FEATURED PRODUCT

FlexShares STOXX Global Broad Infrastructure Index Fund

– Tracks the STOXX Global Broad Infrastructure Index,
providing diversified exposure to the global infrastructure
equity market.

– The index is constructed with the entire infrastructure
complex in mind — sectors include energy, utilities,
communications, transportation and social infrastructure.

– Listed on NYSE Arca (Ticker: NFRA US), the fund houses
$2.6bn in assets and comes with an expense ratio of 0.47%.

Accessing infrastructure through ETFs

Infrastructure was once only accessible to accredited institutional investors as a direct, private investment, but these types of investments have evolved such that they’re now available as publicly traded listed securities.

For example, airports, seaports, cellular tower networks, and fiber optic and cable networks around the globe are all accessible as publicly traded companies.

Combining these securities into an ETF structure gives investors easier access and greater liquidity than private investments.

As the opportunity set has expanded, infrastructure ETFs may support portfolio diversification and income generation, along with potential protection against the risk of long-term inflation.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

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