Certain global infrastructure sectors took some of the hardest hits during the pandemic—but does this asset class represent an opportunity as global economies reopen?
On a recent episode of our Funds in Focus podcast, we spoke with Chris Huemmer, Senior Investment Strategist and Dan Phillips, Director of Asset Allocation about how global infrastructure is faring in the economic recovery. They shared three key considerations when thinking about investing in infrastructure equities:
In this episode, you'll learn
- Key benefits infrastructure can offer investors
- The options available to an investor interested in infrastructure
- The two-fold challenges investors need to be aware of within the infrastructure space
#1: INFRASTRUCTURE INVESTING CAN HAVE BENEFITS—PARTICULARLY IN TODAY’S ENVIRONMENT
When considering investing in infrastructure, it’s first important to understand that the infrastructure complex extends beyond just glorified utilities. When we talk about infrastructure, we’re referring to location-specific and capital-intensive assets that are used in the transportation of goods and services, raw materials, people, and information. We believe investing in global infrastructure can have several potential benefits in today’s market environment:
- Potential benefits from a low rate environment: Many investors look to infrastructure investments as a source of income—which is particularly beneficial in today’s prolonged low interest rate environment. And like real estate, infrastructure tends to benefit from low interest rates, as they result in lower costs and debt financing.
- Inflation hedge: With inflationary expectations on the rise, investors can benefit from infrastructure’s potential to serve as an inflation hedge.
- The hardest hit sectors could be poised for the biggest recovery: At the onset of the pandemic, certain sectors of infrastructure—like air travel, seaports, rails, and pipelines—were hit particularly hard. As global economies reopen, these sectors could be poised to benefit most.
- Potential diversification benefits: Listed infrastructure equities provide investors exposure to both equity markets and interest rates—offering the potential for the diversification benefits that come with differentiated returns.
#2: IT’S IMPORTANT TO DIVERSIFY WITHIN INFRASTRUCTURE
Diversification is key for all asset classes, but even more so for infrastructure, as each of these assets tends to be associated with its own unique risks. These could include regulatory and government regimes change risk, or natural disaster risk—particularly given infrastructure’s capital-intensive and location-specific nature.
The onset of the pandemic further underscored the importance of diversifying within infrastructure, dealing a sharp blow to some infrastructure sectors while others thrived. And it’s important to keep in mind that diversification is not only possible across different infrastructure sectors, but also across geographies, patronage, and sources of revenue streams.
#3: IT’S EASIER TO ACCESS THAN YOU MIGHT THINK
Infrastructure was once only accessible to accredited institutional investors as a direct, private investment, but these assets have evolved such that they’re now available as publicly traded listed securities. For example, airports, seaports, cellular tower networks, fiber optic and cable networks around the globe are all accessible as publicly traded companies. This gives investors easier access and greater liquidity than private investments. And an ETF structure like our FlexShares STOXX® Global Broad Infrastructure Index Fund (NFRA) offers operational ease and transparency, with its global infrastructure equity holdings published on a daily basis.
NFRA tracks an index with a unique methodology that ensures diversification across the global infrastructure equity market. As such, the ETF is constructed with the entire infrastructure complex in mind—extending beyond just glorified utilities and transportation.
Before investing, carefully consider the FlexShares investment objectives, risks, charges and expenses. This and other information is in the prospectus and a summary prospectus, copies of which may be obtained by visiting www.flexshares.com. Read the prospectus carefully before you invest.
Foreside Fund Services, LLC, distributor.
An investment in FlexShares is subject to numerous risks, including possible loss of principal. Fund returns may not match the return of the respective indexes. A full description of risks is in the prospectus.
FlexShares STOXX® Global Broad Infrastructure Index Fund is subject to infrastructure-related companies risk and MLP risk. Risks associated with infrastructure-related companies include: realized revenue volume may be significantly lower than projected and/or there will be costs overruns; infrastructure project sponsors will alter their terms making a project no longer economical; macroeconomic factors such as low gross domestic product ("GDP") growth or high nominal interest rates will raise the average cost of infrastructure funding; government regulation may affect rates charged to infrastructure customers; government budgetary constraints will impact infrastructure projects; and special tariffs will be imposed.
Diversification does not guarantee a profit or protect against a loss.
The STOXX® Global Broad Infrastructure Index measures the performance of companies that generate a least half of their revenues from one of the following 17 sectors defined as infrastructure-specific by a propriety classification system used by STOXX®: Communication (Cable & Satellite, Data Centers, Wireless, Wireless Towers, Wireline), Energy (Energy Utilities, Midstream Energy), Government Outsourcing / Social (Correctional Facilities, Hospitals, Postal Services), Transportation (Air Transportation, Passenger Transportation, Rail Transportation, Road Transportation, Water Transportation) and Utilities (Waste Management and Water Utilities).
The universe of securities for STOXX® Global Broad Infrastructure Index encompasses all constituents of the STOXX® Global Total Market Index listed in developed or emerging markets. The companies within the index universe for the STOXX® Global Broad Infrastructure Index which derive at least 50% of their revenues from one of the 17 sectors above are screened to meet a minimum liquidity measurement and sorted by their free-float market capitalization. The index methodology limits the number of index constituents from each supersector (Communication, Energy, Government Outsourcing / Social, Transportation, Utilities). Further, a maximum number of constituents per sector within each supersector is defined.