How to Invest in Infrastructure Using ETFs

LOW COST FUNDS: Infrastrucuture is the core structures that are vital to the functioning of a country: transportation, utilities, communication - and can provide a stable income

Kenneth Lamont 21 July, 2015 | 11:36AM
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Investors have been attracted to infrastructure for its potential to produce astable income from strong cash flows through time, and for its historically low correlations with major bond and equity indices.

iShares Global Infrastructure ETF pays attractive dividends

An investment in infrastructure is an investment in the core structures that are vital to the functioning of a country.

These include the likes of transportation such as airports, roads and bridges, utility including wind farms and gas pipelines, communication such as telecoms networks and social infrastructure including hospitals, schools and waste management plants.

These assets are generally natural monopolies and therefore are highly regulated. This is a sector where we find a mix of stock-listed private and publicly-owned enterprises. 

Due to the prohibitively high minimum initial investment requirements, direct infrastructure investment is restricted to the largest of institutional investors. However, retail investors may gain exposure to this sector by buying into infrastructure investment funds. A cost-effective and efficient way to do this is by investing in infrastructure ETFs.

The table shows the three most popular European-domiciled ETFs which track global infrastructure indices. These ETFs trade in multiple exchanges, including the LSE. Of the trio, the SPDR Morningstar Multi-Asset Global Infrastructure ETF (MAGI) charges the lowest management fee at 0.40%, while the iShares Global Infrastructure ETF (INFR) charges the highest at 0.65%.

While all three funds track global infrastructure indices, they each are very distinctly separate investment propositions.

db X-trackers S&P Global Infrastructure ETF (XGID) and iShares Global Infrastructure ETF track infrastructure equities, ie they are composed of shares in global infrastructure firms. This approach, while pleasing in its simplicity, has a couple of drawbacks. When investing indirectly in infrastructure equity - rather than in the underlying assets - the investor takes on equity market risk, which tends to increase both the volatility of returns and the correlation with major equity markets.

For example, the iShares and db X-trackers funds have maintained a five-year correlation of 0.7 and 0.89 respectively with the MSCI World index, suggesting that investors would not gain significant diversification by adding these ETFs to an existing global equity portfolio.

But iShares Global Infrastructure ETF does pay attractive dividends, returning a higher dividend than the MSCI World in every year since its inception in 2006. The db X-trackers S&P Global Infrastructure ETF does not pay dividends, which would make it unsuitable for income seeking investors.

The SPDR Morningstar Multi-Asset Global Infrastructure UCITS ETF, a new entrant to the market, takes a different approach. In addition to investing in equities, the ETF’s underlying index also includes bonds issued by infrastructure companies, such as Transport for London and Veolia Environment.

This multi-asset structure is an attempt to better replicate the hybrid equity/bond like returns which make infrastructure such an attractive investment proposition. Compared to its competitors, the SPDR fund also offers a significantly broader exposure, as the index includes around 500 equity and 1,000 fixed income components.

However, due to its short performance history, we are yet to see if the multi-asset SPDR ETF offering can deliver on its promises and prove to be an upgrade on the equity-only exposure offered by the other two funds.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
iShares Global Infras ETF USD Dist GBP2,659.00 GBX-0.47Rating
SPDR® Morningstar Mlt-Asst Glb Infrs ETF33.46 USD-0.31Rating
Xtrackers S&P Global Infras Swap ETF 1C53.22 USD0.82Rating

About Author

Kenneth Lamont  is a passive funds research analyst for Morningstar Europe.