The FlexShares STOXX Global Broad Infrastructure Index Fund (NYSEArca: NFRA) and rival assets are receiving renewed attention as Election Day draws closer, but longer-ranging data suggest infrastructure is a positive portfolio diversification tool.
“Investors seeking income and portfolio diversification may benefit from infrastructure investments,” according to FlexShares research. “Our analysis suggests that infrastructure issuers tend to have predictable cash flows as they provide essential services used in all economic environments. Infrastructure stocks carry both equity and interest rate exposure, and can provide an alternative source of income that may be attractive in a low interest rate environment.”
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 not only infrastructure sectors, but non-traditional ones as well. Investors considering NFRA or any other infrastructure asset are betting this time will be different when it comes to policy execution and implementation.
More Than Politics
NFRA is in the election year spotlight, but there’s more to the story for infrastructure as an asset class and that’s to the benefit of long-term investors.
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 a 3-month average daily trending volume 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. Additionally, the fund is rebalanced annually.
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.
“Our analysis suggests that by adding a 10% allocation funded from the equity portion of a hypothetical standard 60/40 portfolio into the STOXX Global Broad Infrastructure Index (STXGBIV), the resulting effect has been to reduce the overall portfolio exposure to US equity market beta* by an average of 7.4% from 1 November 2013 – 30 June 2019,” according to FlexShares.
Additionally, NFRA can act as an inflation fighter in portfolios.
“Since 2001, global listed infrastructure has been able to cover the inflation effects of high inflationary periods 82% of the time, outpacing more traditional asset classes like fixed income (62%), global equities (66%) and TIPS (70%),” notes FlexShares.
For more on multi-asset strategies, please visit our Multi-Asset Channel.
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.