Infrastructure Investing

Infrastructure investing is an increasingly popular strategy among investors seeking to diversify their portfolios and gain exposure to a sector that is often considered more stable than others.

Infrastructure investments include a wide array of assets, such as transportation networks, power generation, water treatment, and telecommunication systems.

These assets are essential for economic growth and societal well-being, and they can offer investors attractive returns with lower volatility.

This article will look at the various ways to invest in infrastructure, the benefits of doing so, and the best infrastructure ETFs to consider for your portfolio.

Key Takeaways – Infrastructure Investing

• Infrastructure investing offers diversification and stability: Infrastructure investments provide investors with an opportunity to diversify their portfolios and gain exposure to a sector that is often more stable than others. These investments involve essential assets that support economic growth and societal well-being.
• Infrastructure investments offer attractive returns with lower volatility: Infrastructure assets can provide investors with attractive returns and potentially low volatility. They have pricing power and can pass on cost increases to consumers, which helps protect investor returns from inflation.
• Infrastructure ETFs provide convenient access: Investing in infrastructure can be done through various methods, including direct investment, listed infrastructure companies, infrastructure funds, and infrastructure ETFs. Infrastructure ETFs offer investors a convenient way to gain diversified exposure to the sector with a single investment, tracking indices composed of infrastructure companies.

Ways to Invest in Infrastructure

There are several ways to invest in infrastructure, each with its advantages and drawbacks.

The primary methods include:

Direct investment

Investors can directly invest in infrastructure projects, either by providing equity or debt financing.

This approach requires significant capital and expertise in the infrastructure sector, making it more suitable for institutional investors, such as pension funds and sovereign wealth funds.

Listed infrastructure companies

Investors can gain exposure to infrastructure by purchasing shares of publicly traded companies involved in the construction, operation, or maintenance of infrastructure assets.

These companies may operate in various sectors, such as utilities, transportation, or telecommunications.

Infrastructure funds

Managed by professional investment firms, infrastructure funds pool capital from multiple investors to invest in a diversified portfolio of infrastructure assets.

These funds can be either publicly traded or privately held, and they often target a specific sector or region.

The laws and regulations can be very different depending on the municipality, state, province, region, country, or jurisdiction, which tends to lead to specialization in terms of location.

Infrastructure ETFs

Exchange-traded funds (ETFs) focused on infrastructure allow investors to gain diversified exposure to the sector with a single investment.

These ETFs typically track an index composed of infrastructure companies, offering passive exposure to the sector.

Benefits of Investing in Infrastructure

Infrastructure investing offers several benefits to investors, including:

Diversification

As infrastructure assets often (but not always) have lower correlation with traditional investments, they can help diversify a portfolio and reduce overall risk.

Stability

Infrastructure investments tend to be more stable than other asset classes, as they involve essential services that are less sensitive to economic fluctuations.

Inflation protection

Infrastructure assets often have pricing power, enabling them to pass on cost increases to consumers.

This characteristic helps protect investor returns from the erosive effects of inflation.

Attractive yields

Infrastructure investments can provide relatively high yields, making them appealing to income-seeking investors.

Social impact

By investing in infrastructure, investors can contribute to the development and maintenance of essential services that promote economic growth and improve the quality of life for communities.

Infrastructure investing can be considered a form of impact (thematic) investing.

Best Infrastructure ETFs

For investors seeking diversified exposure to infrastructure through ETFs, three of the best options include:

Global X Infrastructure ETF (GII)

This ETF tracks the performance of the Indxx Global Infrastructure Index, providing exposure to a diverse range of infrastructure companies worldwide.

iShares Global Infrastructure ETF (IGF)

IGF follows the S&P Global Infrastructure Index, offering investors exposure to companies involved in the transportation, utilities, and energy sectors.

FlexShares STOXX Global Broad Infrastructure Index Fund (IFRA)

IFRA is designed to track the STOXX Global Broad Infrastructure Index, giving investors access to a comprehensive portfolio of global infrastructure companies.

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When selecting an infrastructure ETF, investors should consider factors such as fees, liquidity, and the underlying index’s exposure to various sectors and regions.

By carefully evaluating these factors, investors can choose the most suitable ETF to meet their investment objectives and risk tolerance.

Valuation of Infrastructure Assets

FAQs – Infrastructure Investing

How does infrastructure investing differ from investing in traditional stocks and bonds?

Infrastructure investments focus on the essential physical and organizational structures that support a society, such as transportation systems, utilities, and telecommunications networks.

These investments can add something different to a portfolio, making them an attractive option for diversification and income generation.

What are the risks associated with infrastructure investing?

Some risks associated with infrastructure investing include:

• regulatory changes
• political instability
• natural disasters
• technological advancements, and
• project-specific risks like cost overruns or construction delays

Is infrastructure investing suitable for all types of investors?

Infrastructure investments can be a suitable option for various investors, particularly those seeking diversification, income generation, and a degree of inflation protection.

However, each investor should consider their investment objectives, risk tolerance, and time horizon before investing in infrastructure (or any particular sector or investment).

What is the difference between public and private infrastructure funds?

Public infrastructure funds are typically traded on stock exchanges and are accessible to a broad range of investors.

Private infrastructure funds, on the other hand, are generally limited to accredited or institutional investors and may require higher minimum investments.

While private funds may offer access to a wider range of projects, they often come with higher fees and less liquidity compared to public funds.

How do infrastructure ETFs generate income?

Infrastructure ETFs generate income through dividends paid by the underlying companies in the ETF’s portfolio.

These dividends are typically distributed to ETF shareholders on a regular basis, such as monthly or quarterly.

How can I evaluate the performance of an infrastructure ETF?

Investors can evaluate the performance of an infrastructure ETF by examining its historical returns, comparing them to relevant benchmarks, and considering the ETF’s fees and expense ratios.

Additionally, investors should evaluate the ETF’s underlying index and its exposure to various sectors and regions to ensure alignment with their investment objectives.

Are infrastructure investments sensitive to interest rate changes?

Infrastructure investments can be sensitive to interest rate changes, particularly those with high levels of debt financing.

When interest rates rise, the cost of borrowing increases, which can negatively impact the profitability and valuation of infrastructure assets.

However, some infrastructure investments may have long-term contracts with inflation-linked pricing, which can provide a level of protection against rising interest rates.