What You Need to Know About Infrastructure ETFs

by: Smith and Howard

February 19, 2015

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Many of us have read or watched news reports about the poor conditions of our nation’s roads, electrical grids, airports, water supply plants and buildings. Whether it’s a bridge crumbling from neglect or a highway so riddled with potholes that it blows out your tires, government entities need funds to help rebuild America’s infrastructure.

Fortunately, there’s a good option for financing such endeavors: exchange-traded funds (ETFs). These funds have continued to grow in popularity and have gathered assets at a rapid pace. They trade like stocks and have the diversity of mutual funds.

ETFs can help you not only diversify your portfolio, but also finance much-needed construction and repair of infrastructure in the United States. Of course, as with any investment, ETFs bring both potential reward and risk.

An open door

Both developed countries — such as the United States and Great Britain — and developing countries will need to extend or revamp their infrastructures in the coming years. And, with many governments still strapped for cash, the door is wide open for private investors to get involved in financing infrastructure construction and repair.

Whether it’s for bridges and dams, railways and roads, waste disposal, telecommunications, power stations, pipelines, or ports, these worthy projects warrant backing. ETFs can help investors do just that.

These funds may offer a safer, more dependable income stream than some other types of real estate investment options. While the real estate market continues to lag behind other industries, many governments are ready to spend trillions of dollars on infrastructure projects.

In addition, many infrastructure assets have a virtual monopoly on the markets. And the large monetary investment required to develop most infrastructure assets makes it highly unlikely that competing assets will ever be built.

Unfortunately, the distinct opportunities presented by infrastructure investing are accompanied by unique challenges. Industry growth and consolidation, new investment products, government intervention and regulatory changes could all affect infrastructure investors in years to come. Asset-specific risks relating to the design, construction and operation of infrastructure assets pose additional challenges.

Uncommon asset class

In light of the related risk and high capital requirements for infrastructure investing, investors may want to consider accessing this uncommon asset class through index-based ETFs, which trade like stocks on an exchange and offer diversity similar to that of mutual funds.

But unlike mutual funds — which try to outperform the market — index ETFs sync with a major market index and can be traded intraday or in aftermarket sessions. Because they are passively managed, ETFs also offer lower administrative expenses and fees than do mutual funds.

Infrastructure ETFs mimic the performance of certain indexes, such as the S&P Global Infrastructure Index and the Macquarie Global Infrastructure 100 Index. These indexes are designed to help investors track infrastructure companies, monitor fund performance and allow easier investment in ETFs.

Because of their particular attributes, infrastructure ETFs may warrant attention from investors interested in defensive, high-yielding securities. Infrastructure investing isn’t without risk, however. Rates of return vary vastly from project to project and, even though infrastructure is somewhat insulated, it isn’t immune to the ebb and flow of economic tides.

Necessary due diligence

If you’re interested in ETFs, make sure you do your due diligence. Work with a qualified financial advisor and stockbroker.

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