The infrastructure sector has evolved, and investors can turn to an exchange traded fund strategy to gain exposure to the modern infrastructure industry.
In the recent webcast, Infrastructure: A New Take on an Evergreen Concept, Christopher Huemmer, Senior Investment Strategist, Northern Trust Asset Management, explained that the infrastructure asset category that provides exposure to mid-stream projects focused on the movement of people, resources, goods, and information. Infrastructure asset characteristics include essential services operating in a fairly monopolistic environment, large capital intensive projects, high barriers to entry, pricing oversight by government entities, and fairly predictable expenditures and asset maintenance.
Huemmer argued that the distinct characteristics of infrastructure investing may lead to several benefits, including historically low correlation to global equity markets, defensive in nature and may offer risk mitigation in down markets, stable cash flows and predictable capital expenditures that lead to income generation, regulated pricing often tied to CPI, a long-term inflation hedge, and less sensitivity to commodity prices.
Basically, Huemmer believed that infrastructure is attractive today because global yields are low, market volatility has increased, and the search for yields continues.
Huemmer pointed out that listed infrastructure assets can provide access to the asset class efficiently. Listed infrastructure is suitable for short-term tactical allocation change and come with liquidity for intraday market trading. They provide access to real assets when private investing is not an option. Listed infrastructure may even be a suitable complement to private investments as it provides for a short-term investment vehicle while waiting for capital calls for private investments. It also comes with lower transaction costs than private real assets.
When locating infrastructure within asset allocation frameworks, Huemmer argued that the infrastructure investment goals target diversification of equity exposure, income generation, and downside mitigation. Furthermore, as a real asset, the segment provides diversification of real asset allocation and inflation protection.
Specifically, investors can look to the FlexShares STOXX Global Broad Infrastructure Index Fund (NYSEArca: NFRA). NFRA tries to reflect the performance of the STOXX Global Broad Infrastructure Index, which identifies equities that derive the majority of revenue from infrastructure business, providing exposure to infrastructure sectors and non-traditional ones.
NFRA’s index focuses on long-lived assets in industries with very high barriers to entry, with at least 50% of their revenue from key sectors with 3-month average daily trending volumes of at least $1 million. The portfolio is weighted based on a free-float market cap with certain constraints to limit exposure in any one security, sub-sector, or country. The fund is rebalanced annually.
Financial advisors who are interested in learning more about infrastructure investments can watch the webcast here on demand.