In the coming days, markets and voters should get more clarity on the Democratic presidential nominee, meaning the 2020 campaign is sure to heat up and that could bring infrastructure investing into focus.
That could provide a spark for ETFs, including 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 not only infrastructure sectors, but non-traditional ones as well.
Politics are important when it comes to infrastructure assets, but there are other themes at play that bode well for the long-term NFRA thesis.
“According to Volcker Alliance, the U.S. faces a backlog of $873 billion worth of repairs for infrastructure projects such as roads and highways across the country,” according to FlexShares. “This offers a state-level opportunity for investments, which could last for several years if not longer, as larger states enter a much-needed infrastructure spending phase.”
Seeking NFRA Opportunity
The infrastructure category has also historically offered higher dividend yields than global fixed-income and global equities, along with greater predictability of long-term cash flows. The ETF may be able to capture the growing demands of economic development that are driving more funding into transport, power, and other systems.
“The infrastructure sector is less prone to the cyclical movements of the economy, which makes it a viable alternative as a defensive play,” notes FlexShares. “This is particularly important for investors to consider with the ongoing volatility from coronavirus. One reason infrastructure is less prone to cyclical movements is because it’s often considered a necessity. Despite the state of the economy, there’s a continuous effort around the country to speed up traffic-clogged highways and modernize aging infrastructure.”
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.
“Given the nature of ETFs, investors can benefit from exposure to an array of securities, sub-sectors, and countries in one single fund; while also benefiting from greater liquidity than a traditional infra investment. Depending on the composition of an ETF, it can offer exposure to both traditional and non-traditional sub-sectors,” according to FlexShares. “For example, Flexshares’ NFRA provides exposure to global opportunities, targeting infrastructure upgrades across both developed markets and emerging markets. As many ETFs such as NFRA rebalance annually, it ensures a well-balanced and diversified fund, ultimately maximizing opportunities for returns.”
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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.