Infrastructure, Real Estate, and Long-Term Inflation Planning

While it’s widely expected that the Consumer Price Index (CPI) is in store for near-term upside, those increases may well be transitory.

Some market observers are even saying inflationary pressures could ebb as soon as later this year. However, that’s a prediction – not hard fact. It’s possible that higher prices will prove sticky. Even if the transitory outlook is confirmed, pinpointing exactly when CPI increases will come to pass is difficult, even for the experts. Financial advisors may be wise to heighten their long-term inflation protection.

Infrastructure and real estate are among the asset classes that offer that protection. These sectors are accessible via an array of exchange traded funds, including the FlexShares Global Quality Real Estate Index Fund (NYSEArca: GQRE) and the FlexShares STOXX Global Broad Infrastructure Index Fund (NYSEArca: NFRA).

“Exposure to real estate and infrastructure companies traditionally has been useful for investors concerned about the impact of long-term inflation,” according to FlexShares research.

Inflation Another Reason to Consider ‘GQRE’, ‘NFRA’

Up an average of 10.50% year-to-date, GQRE and NFRA already have non-inflation tailwinds. The real estate fund is benefiting from investors’ search for yield and that sector’s rebound from its 2020 coronavirus drubbing.

Likewise, NFRA is being bid higher because infrastructure also offers above-average yields and the group is generating plenty of buzz in anticipation of Congress passing some version of President Biden’s infrastructure plan.

Against an inflationary backdrop, real estate investment trusts (REITs), including GQRE components, are compelling because landlords have pricing power. Many commercial REITs sign mid- to long-term leases with tenants and those agreements feature gradual rent increases. Those hikes make REITs an attractive inflation-fighting group for investors.

Regardless of how inflation plays out, GQRE and NFRA offer investors another benefit: global diversification. Neither FlexShares fund is solely dedicated to domestic equities. U.S. stocks account for 40% of NFRA and 59% of GQRE.

“When investing in either asset class, though, diversification is critical in seeking to reduce the risk of unintended concentration in specific regions or sectors,” adds FlexShares. “For example, many real estate strategies invest only in U.S. REITs, which tend to be more volatile than international REITs. Sector concentration risk is a concern in traditional infrastructure strategies. These tend to be heavily invested in sectors such as pipelines and utilities, making them overly sensitive to energy prices.”

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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.