Investors looking to reduce correlations to traditional assets while boosting yield gaining some downside protection in the currently rough market environment may want to consider infrastructure assets and the ProShares DJ Brookfield Global Infrastructure ETF (NYSEArca: TOLZ).
With a dividend yield north of 3%. TOLZ has outperformed the S&P 500 by about 230 basis points over the past week as equities have been slammed by the COVID-19 epidemic.
TOLZ “focuses on companies whose assets include airports, toll roads, ports, communications, electricity distribution, oil and gas storage, and transport, and water in both developed and emerging markets. To be included in the index, companies must derive more than 70% of their cash flows from infrastructure assets. The index excludes companies that supply services such as construction and engineering to the infrastructure industry,” according to ProShares.
One of the advantages of infrastructure is that regardless of what the global economy is doing, it’s a necessity. Furthermore, it’s less prone to the cyclical movements of the economy, which makes it a viable alternative as a defensive play.
Talking TOLZ
“Infrastructure—transportation, energy, water, and communication—is essential to modern society,” said ProShares in a recent note. “As an asset class, infrastructure has historically offered growth potential, steady income, and resilience during market downturns. Infrastructure can be attractive in many economic climates and for many investors.”
Furthermore, infrastructure exposure could help protect against long-term inflationary risks since most infrastructure operators pass through the cost increases of inflation to users per long-term contracts that typically underpin the infrastructure business models.
“Many developed countries lag in repairing or replacing aging infrastructure, whether it’s deteriorating bridges and roads, overused transportation hubs or communications systems in need of upgrades,” according to ProShares. “And as developing economies emerge and megacities of more than 10 million inhabitants grow, the need for new infrastructure to deliver clean water, electricity, transportation, and communication is likely to escalate. In fact, it’s estimated that globally, $94 trillion will need to be spent by 2040 to meet these requirements.”
The Organization for Economic Co-operation and Development is calling for $70 trillion needed in infrastructure spending around the world, but governments have only earmarked $45 trillion, leaving a gap of around $25 trillion that is not going to be covered. Consequently, private spending may need to step in to fill the gap.
Numbers like that bode well for TOLZ long-term thesis.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.