Global infrastructure sector-related exchange traded funds may help diversify a stock portfolio as inflation picks up ahead, but investors should keep in mind currency risks when exposed to the fluctuating foreign exchange market.
Investors should consider incorporating the often overlooked real asset category to help diversify an investment portfolio, Robert Bush, ETF Strategist at Deutsche Asset Management, said in a note.
Real assets are comprised of “tangible, physical assets, such as transportation or communication infrastructure, residential, commercial or industrial real estate; or often a commodity or energy linked asset,” Bush said. “Such assets frequently have high barriers to entry because of their physical size, the upfront capital required to create them, or the regulatory framework within which they operate (think of power plants, or airports, for example).”
These areas can also benefit from inelastic demand due to the essential services they provide and from contractual pricing and margin mechanisms that come from operating fixed utilities, tolls and bridges.[related_stories]
Bush argued that by gaining exposure to infrastructure stocks, investors can hedge against inflation, diversify a portfolio and generate attractive yields.
Real assets typically perform well during periods of rising inflation, and with President-elect Donald Trump expected to fuel growth and inflation ahead through fiscal stimulus measures, investors should begin to consider ways to shield their portfolios from inflationary pressures.
Infrastructure stocks are also relatively uncorrelated with stocks, providing investors with an added level of diversification. Specifically, Bush pointed out that in the period of November 11, 2015 through October 31, 2016, the correlation to the S&P 500 Index of 0.78 for the Deutsche X-trackers S&P Hedged Global Infrastructure ETF (NYSEArca: DBIF).
The sector can also produce attractive yields for income-minded investors. For example, DBIF shows a 3.05% 12-month yield.
Furthermore, with the U.S. dollar now strengthening on the improved growth outlook and speculation of a Federal Reserve interest rate hike around the corner, a hedged strategy may help investors diminish currency risk when gaining exposure to overseas markets.
Along with a 39.8% tilt toward the U.S. market, DBIF includes 9.4% Canada, 8.8% Spain, 8.1% Australia, 5.9% Italy, 5.6% United Kingdom, 4.3% France, 3.8% China, 3.1% Japan and 2.4% Mexico exposures. The fund tries to mitigate exposure to fluctuations between the U.S. dollar and non-U.S. currencies through forward currency contracts.
For more information on the infrastructure sector, visit our infrastructure category.