Investors seeking a more stable asset category may want to take a look at infrastructure stocks and sector-related exchange traded funds.
“Good infrastructure products are unlikely to wildly outperform equity markets – but nor are they likely to create serious losses in a portion of investors’ portfolios that should be defensive,” writes Thomas Hoops, executive vice president and head of business development at Legg Mason Global Asset Management, for InvestmentNews. “They can be highly attractive to investors seeking solid income from relatively lower-risk investments.”
Hoops argues that infrastructure investments can help provide lower volatility than traditional growth assets, generate attractive yields and hedge against inflation.
The infrastructure asset category is also a good portfolio diversifier as the investment is relatively uncorrelated to the equity markets. In tough and good times, people will still utilize the basic infrastructures of an well-functioning economy, which also makes infrastructure stocks a decent defensive play.
“Given the resilience of the underlying assets, these securities could help mitigate the effects of broader market pullbacks,” Hoops said.
Infrastructure products are easy to understand. Hoops explains that companies make large upfront capital investments to build these assets and the owner generates a profit through charging user fees. Consequently, cash profit margins may be high and stable over time, which translates to dependable dividend streams for investors.
However, investors seeking rapid growth will be disappointed as these infrastructure investments provide more slow and steady returns.
“In general these are steady, defensive, even boring, investments,” Hoops added. “As long as people continue to travel via toll roads, trains and airports, and consume water or utilities in predictable ways, well-chosen infrastructure products should be able to deliver dependable returns.”
For ETF investors interested in the infrastructure space, there are a number of yield-generating global infrastructure options to choose from. For example, the FlexShares STOXX Global Broad Infrastructure Index Fund (NYSEArca: NFRA) has 2.36% 12-month yield, iShares Global Infrastructure ETF (NYSEArca: IGF) has a 3.11% 12-month yield, SPDR FTSE/Macquarie Global Infrastructure (NYSEArca: GII) has a 3.16% 12-month yield and ProShares DJ Brookfield Global Infrastructure ETF (NYSEArca: TOLZ) has a 3.88% 12-month yield. [A Look At Infrastructure ETFs As IMF Urges Increased Spending]
Investors may also access the growing space through the recently launched Guggenheim High Income Infrastructure ETF (NYSEArca: GHII), 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. The ETF has a 5.32% 30-day SEC yield. [Why Consider a Global Infrastructure ETF Position]
Additionally, those 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. DBIF has a 3.97% dividend yield. [A Global Infrastructure ETF With a Twist]
Legg Mason does not offer any infrastructure ETFs, but the money manager is working on a number of alternative or smart-beta index-based ETFs. [Legg Mason Crafting Four Smart-Beta, Index-Based ETFs]
For more information on the infrastructure sector, visit our infrastructure category.
Max Chen contributed to this article.