Investors may find opportunities in the global infrastructure industry and sector-related exchange traded funds as overseas countries develop their internal framework to accommodate expanding economies and the U.S. begins to address aging roads in disrepair.
S&P Capital IQ Equity Analyst Jim Corridore believes that infrastructure companies could see increased demand over the next several years on greater need for upgrade and expansion of infrastructure from the U.S. and around the world, according to a recent S&P Capital IQ research note.
In the U.S., Corridore argues that the aging and outdated roads, electric transmission grids and energy transmission facilities are in need of upgrades while pipelines, water treatment and rail will require expansions to accommodate growing demand. America’s civil engineers recently graded the nation’s major infrastructure category, noting a poor cumulative GPA for infrastructure of D+, with rail and bridges earning a C+. Almost one-third of U.S. states, though, are already taking matters into their own hands, raising local taxes to support improvements in roads and bridges.
Looking overseas, countries are already allocating money toward infrastructure projects. For instance, Japan has invested $100 billion for roads, bridges, railways and other building projects in Asia. China has already stated it will put billions into a so-called Silk Road infrastructure project to connect Asian economies.
Infrastructure investments also provide stability and offer some attractive yields.
“Though timing of contract awards are uncertain, S&P Capital IQ believes these projects tend to have long-term contracts that provide steady cash flows and predictable revenue streams,” according to Todd Rosenbluth, Director of ETF & Mutual Research at S&P Capital IQ. “Meanwhile, a recent report from S&P Dow Jones Indices, which operates independently from S&P Capital IQ, cited benefits from global infrastructure investments, including a relatively steady cash flow with a strong yield component; high barriers to entry; and inflation protection.”
ETF investors can also tap into the sector through a number of options. For instance, the iShares Global Infrastructure ETF (NYSEArca: IGF) and SPDR S&P Global Infrastructure ETF (NYSEArca: GII) track the S&P Global Infrastructure Index. The two ETFs include about a 40% tilt toward transportation infrastructure, along with electric utilities 22% and oil, gas & consumable fuel companies 20%. IGF has a 3.03% 12-month yield and GII has a 3.08% 12-month yield. [A Look At Infrastructure ETFs As IMF Urges Increased Spending]
The S&P Global Infrastructure index generated a 9.6% annualized return in the past three-years ended July 2015, but the strong U.S. dollar weighed on returns, with the currency neutralized infrastructure index returning 13.0% over the past three-years.
ETF investors who are wary of additional currency risks can also take a look at the recently launched Deutsche X-trackers S&P Hedged Global Infrastructure ETF (NYSEArca: DBIF), which includes similar exposure to IGF and GII, except DBIF tries to mitigate the negative effects of falling foreign currencies. Potential investors should also be aware that the hedged infrastructure ETF is still relatively small, so use limit orders to better control trades. [A Global Infrastructure ETF With a Twist]
For more information on the infrastructure sector, visit our infrastructure category.
Max Chen contributed to this article.