As investors seek out yield-generating options to bolster their portfolios, one may take a look at a global infrastructure exchange traded fund to tap into a growing industry and garner attractive yields.
On the recent webcast, Infrastructure Investing for Income and Lower Volatility, Vinit Srivastava, Senior Director at S&P Dow Jones Indices, explains that the infrastructure companies generate relatively steady cash flows with a strong yield component, have a strong economic moat, are an inflation hedge and will experience growth as emerging markets expand.
The industry have long-term contracts, which means that many companies have a long-term plan in place. Additionally, once the projects are set up, the companies will enjoy high operating margins and low cost of maintenance, which can help produce steady cash flows.
The sector also has a high barrier to entry as the community is mostly monopolistic covered by regulations, Srivastava added. The high cost to setup also helps dissuade new competitors from easily entering the space.
The infrastructure contracts are also linked to inflation or they are able to pass on the inflation to consumers. The income linked to inflation, along with ability to return cash to shareholders, may act as an inflation hedge, Srivastava said.
“Global infrastructure securities may provide a lower correlation to traditional asset classes, such as stocks and bonds, and offer a hedge against inflation,” Bill Belden, Managing Director at Guggenheim Investments, said.
Looking ahead, the emerging markets are spending on infrastructure to build out their economy while developed markets are updating aging assets.
Investors may access the growing space through a recently launched Guggenheim High Income Infrastructure ETF (NYSEArca: GHII), which has a 4.15% 30-day SEC yield.
“While there are other infrastructure ETFs out there – when we created GHII, we wanted to focus on the yield component. Yield weighting solves the issue that many investors have today – getting income,” Belden added. “Now investors can get infrastructure exposure without sacrificing total return.”
GHII is the first yield-weighted infrastructure ETF to come to market. The new ETF tracks the S&P High Income Infrastructure Index, which is composed of the 50 highest-dividend-paying companies within the S&P Global BMI that operate in the energy, transportation, and utilities sectors. Specifically, utilities is 49.9% of GHII’s portfolio weight, followed by industrials 33.3% and energy 16.8%.
Sub-industries include oil & gas storage & transportation 29.9%, electric utilities 24.5%, multi-utilities 14.1%, highways & railtracks 10.8%, gas utilities 5.5%, airport services 4.5%, marine ports & services 4.3%, independent power producers & energy traders 3.1%, water utilities 2.5% and renewable electricity 0.7%.
The infrastructure ETF also includes a global tilt, with top country weights including U.S. 19.7%, Australia 14.8%, China 9.4%, Spain 8.7% and Italy 8.1%.
Financial advisors who are interested in learning more about the infrastructure space can listen to the webcast here on demand.