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An ETF to Capture the Growing Global Demand for Infrastructure

This article was originally published on ETFTrends.com.

Investors can consider an infrastructure sector-specific exchange traded fund as an alternative investment to diversify away from risks associated with traditional stocks and bonds.

"We're bullish on infrastructure," Christopher Huemmer, vice president and senior investment strategist for FlexShares Exchange Traded Funds, told ETF Trends in a call. "We see growing demand for it globally."

Huemmer pointed out that the Organisation for Economic Co-operation and Development is calling for $70 trillion needed in infrastructure spending around the world, but governments have only earmarked $45 trillion, leaving a gap of around $25 trillion that is not going to be covered. Consequently, private spending may need to step in to fill the gap.

"Around the world, there are two major trends in infrastructure. In developed market economies, infrastructure is in critical need of upgrades and modernization after decades of under-investment, while in emerging economies, there is high demand for new infrastructure to meet the needs of a rapidly growing middle class. Taken together, according to the Boston Consulting Group, these two forces could combine for a global infrastructure build-out of over $40 trillion by 2030," FlexShares said in a note.

Many view the infrastructure sector as an alternative asset that can help investors diversify a stock and bond portfolio due to the sector's lower correlation to traditional assets.

"Infrastructure has characteristics of both equity and fixed income due to the predictable revenues and expenses tied to these assets," Huemmer said, adding that they exhibit inelastic demand since everyone will still utilize water, telecom services or roads, regardless of a boom and bust cycle.

Infrastructure developments are typically large, long in duration and capital-intensive, carrying a high overall cost. Nevertheless, the projects compensate investors by including fairly predictable expenditures to maintain the asset, as well as regulated pricing that typically provides stable and reliable cash flows. Select investors have long enjoyed the unique characteristics of infrastructure to diversify equity risk exposure, generate income and hedge against long-term inflation.

Investors who are interested in the infrastructure sector can look to something like the FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA) .

Huemmer explained that FlexShares originally identified two problems with legacy infrastructure indices: an overweight tilt toward energy and transport; and the absence of key pieces of the global infrastructure asset class from which active managers can find alpha.

"We wanted a broad, global index that provides excellent diversification, and STOXX delivered," Huemmer said.

NFRA tries to reflect the performance of the STOXX Global Broad Infrastructure Index, which identifies equities that derive the majority of revenue from infrastructure business, providing exposure to not only infrastructure sectors, but non-traditional ones as well. It’s currently allocated as follows: 7.3% utilities, 26.6% transportation, and 30.1% energy among traditional sectors, along with 30.2% in communications and 4.2% in government outsourcing/social non-traditional sectors. The indexing methodology halves the exposure and risk associated to the energy sector, compared to more widely observed infrastructure benchmarks.

The underlying index focuses on long-lived assets in industries with very high barriers to entry, with at least 50% of their revenue from key sectors with 3 month average daily trending volume of at least $1 million. The portfolio is weighted based on a free-float market cap with certain constraints to limit exposure in any one security, sub-sector, or country. Additionally, the fund is rebalanced annually.

For more information on the infrastructure sector, visit our infrastructure category.

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