How to Obtain Real Asset Exposure by Investing in Infrastructure ETFs

What are Infrastructure ETFs?

Infrastructure ETFs are an increasingly popular thematic investment choice for those looking to diversify their portfolios with real assets that often provide a hedge against inflation. These ETFs vary in their benchmark and strategy, but most share three key characteristics:

1.       Sector and Sub-Industry Focus: Infrastructure ETFs invest in sectors crucial to the economy's functioning, including utilities, energy (particularly renewable energy), transportation (such as airports and toll roads), telecommunications (like cell towers), and real estate. The real estate focus might include commercial properties or real estate investment trusts (REITs), while telecommunications investments often highlight cell towers.

2.       Investment Theme and Benefits: These ETFs are centered around the theme of infrastructure, involving the investment in long-term, stable assets that provide essential services with consistent demand. This results in relatively predictable cash flows, making infrastructure a compelling option for those seeking stable income, typically through dividends. As real assets, these investments often act as a hedge against inflation since the cash flows from these assets can be adjusted in line with rising prices.

3.       Liquidity and Accessibility: Unlike direct investment in physical infrastructure, which is often capital-intensive and illiquid, infrastructure ETFs offer the benefit of liquidity. They allow investors to gain exposure to this asset class without traditional barriers like high investment minimums and long-term commitments. This liquidity makes infrastructure ETFs an attractive option for a wide range of investors, offering a convenient way to add diversification to an investment portfolio with real assets.

Infrastructure ETF Options

To find all the infrastructure ETFs currently available, investors can use the ETF Central screener, which can be configured to filter based on numerous factors such as strategy, geography, and more.

In terms of sheer assets under management, this segment is dominated by five passive funds that all track benchmark indexes: the Global X U.S. Infrastructure Development ETF (PAVE), the iShares Global Infrastructure ETF (IGF), the First Trust North American Energy Infrastructure ETF (EMLP), the FlexShares STOXX Global Broad Infrastructure Index Fund ETF (NFRA), and the iShares U.S. Infrastructure ETF (IFRA).

It's crucial to read closely before investing, as exposures between these ETFs can differ significantly. For example, PAVE and IFRA are U.S. only, while IFG and NFRA have a global focus.

The underlying sector exposures can vary too – for example, EMLP only focuses on U.S. and Canadian utilities and energy companies. Others can get even narrower within the infrastructure theme – for example, the Pacer Data & Infrastructure Real Estate ETF (SRVR) focuses on developed market real estate companies that manage data infrastructure properties.

Despite the prominence of these passive index-tracking ETFs, active investors can also find some hidden gems in the infrastructure ETF segment. A great example is the recently launched Macquarie Global Listed Infrastructure ETF (BILD), which is actively managed at a reasonable 0.49% expense ratio.

Macquarie's reputation in the infrastructure sector is well-established, with a deep understanding of the complexities and nuances of infrastructure investments. This expertise is critical in actively managing an infrastructure-focused ETF, as the sector requires detailed knowledge of the varied sub-industries and the economic and regulatory factors impacting them.

Opting for an ETF managed by a specialist firm like Macquarie, as opposed to a more generalized "big box" ETF provider, can offer advantages. Specialist firms often have dedicated teams with sector-specific expertise, allowing them to make more informed investment decisions. This depth of knowledge can be particularly valuable in navigating the complexities and specific risks associated with infrastructure.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.