With equities still struggling amid some challenging economic data, investors may want to consider assets with reduced correlations to common stocks, an objective accomplished by 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.
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.
“In these turbulent markets, investors seeking to stabilize and diversify their portfolios while adding income may benefit from infrastructure investments,” said FlexShares in a recent note. “Infrastructure issuers provide essential services typically used in all economic environments, and as a result tend to have predictable cash flows.”
Plenty of Perks
The strong, consistent demand for infrastructure has delivered stable, repeatable cash flows to investors. Meanwhile, population growth, aging infrastructure, and constrained government budgets are creating opportunities for the private sector. The high cost of entering the infrastructure business also limits competition or provides a wide economic moat for those already in the field.
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.
“Infrastructure investments may provide an alternative source of income that can be attractive in a low-interest rate environment and while our research suggests that infrastructure stocks carry both equity and interest rate exposure, as seen in the graph below, they have historically had comparatively lower correlation to global equities markets,” according to FlexShares.
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.
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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.