Thematic investing with ETFs: Infrastructure

Oct 2nd, 2017 | By | Category: Equities

This is the fourth in a series of five articles, each covering a different area of thematic investing using ETFs. Themes covered in previous articles are cybersecurity, robotics and automation, and healthtech. In this article, we take a look at how investors can use ETFs to gain exposure to infrastructure.

Thematic investing using ETFs: Infrastructure

Infrastructure assets can offer investors long-term, steady cash flows that are often uncorrelated with other asset types.

Infrastructure is an essential part of a functioning society. It encompasses the physical structures and services that connect the different parts of a society and enable its efficient functioning.

Infrastructure typically involves the movement of goods, people, water and energy critical to economic productivity. It’s the sort of thing you take for granted when it works well and can’t live without when it goes wrong.

The main components of infrastructure as an asset class are transport (airports, railways, bridges, toll roads etc) and utilities and energy (sewage plants, electricity pylons, oil pipelines etc), but the segment also includes communications infrastructure, parking, education and healthcare facilities, and housing.

Due to high cost, strategic importance and lengthy investment horizons, infrastructure investment has traditionally been the preserve of governments. However, infrastructure has emerged as an asset class in its own right since mass privatisations in the 1990s, and investors are increasingly considering it an attractive proposition in this low yield environment, while new investment vehicles are making it easier than ever to get involved.

But what sets infrastructure apart from other assets? Chief among the benefits of owning infrastructure assets is the potential for long-term, steady cash flows, often partly protected from inflation. The long life and high intrinsic value of infrastructure assets can be a good match for the long-term liabilities of pension funds, for example.

Investors also cite the diversification benefits of including infrastructure in a portfolio, as returns can show little correlation with other assets. Returns are also relatively uncorrelated with the economic cycle due to the essential nature of the services many infrastructure assets provide. Infrastructure assets also typically operate in markets that have high barriers to entry due to regulation or high costs, making competition less likely and profit margins healthier.

Investing in infrastructure can take many forms, and there are many options available to ETF investors who want to gain exposure to the asset class. Infrastructure ETFs listed on European exchanges are offered by BlackRock, Source, SPDR ETF, Amundi, Lyxor, Deutsche Asset Management and ETF Securities.

The largest is the iShares Global Infrastructure UCITS ETF (LON: INFR) which has amassed $853 million since its launch in 2006. The fund recently changed its index to the FTSE Global Core Infrastructure Index, which gives exposure to developed and emerging market equities that derived at least 65% of their revenues from the ownership, management or operation of infrastructure. In the year to date, the ETF has returned 13.8% with a distribution yield of 2.59%. The fund is physically replicated and has a total expense ratio of 0.65%.

The second largest is the Source Morningstar US Energy Infrastructure MLP UCITS ETF (LON: MLPS) which provides exposure to US energy infrastructure via Master Limited Partnerships (MLPs). It is linked to the Morningstar MLP Composite Index, a diversified rules-based index targeting 97% of the MLP universe that currently has 36 constituents. So far, the ETF has had a difficult 2017, returning -7.8% in the year to date. The fund, which was the first in Europe to provide exposure to US energy MLPs, has $633m in AUM with a management expense ratio of 0.50% and a swap fee of 0.75%.

This particular market segment is also served by the ETFS US Energy Infrastructure MLP GO UCITS ETF (LON: MLPI), which was launched in May 2014 and has assets of $35m with a management fee of 0.25%. The ETF has a dividend yield of 6.3% and has faired a little better in 2017 than the Source product, returning -5.2% so far this year.

Other notable ETFs include the SPDR Morningstar Multi-Asset Global Infrastructure UCITS ETF (LON: MAGI), which includes an equal weight of equity and fixed income securities related to infrastructure. The fund currently has 983 constituents and has returned 12.2% so far in 2017 with a dividend yield of 2.1%. The ETF was launched in April 2015 has $88m in AUM with a TER of 0.40%.

All data correct to 31 August 2017.

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