We build our everyday lives over infrastructure. It includes water and sewer services, utilities, shipping and waste management. An infrastructure fund invests in companies providing these systems. Such funds can decrease volatility in a portfolio. Here’s what to know about those funds before you invest.
What is an Infrastructure Fund?
Infrastructure funds invest in public assets and services that people rely on to live, work and travel. These funds can invest in things like:
- Electric and other utility services.
- Water and sewage services.
- Waste management companies.
- Rail travel companies.
- Shipping and freight services.
- Engineering and construction.
- Oil and gas pipelines.
- Law enforcement and emergency services.
- Education services.
- Agriculture and farming.
- Communications services, including cell phone towers.
An infrastructure fund may not seem quite as glamorous as a fund investing in something like biotech. But infrastructure funds focus on services and systems required for living. As a result, they can provide investors with stable and consistent returns.
Types of Infrastructure Funds
Infrastructure funds may have different investment objectives. Funds may focus on capital appreciation or income. Also, they may highlight U.S. infrastructure companies or global ones.
Here are some examples of different infrastructure funds and how they compare:
- Global X US Infrastructure Dev ETF (PAVE) – This exchange-traded fund attempts to match the performance of the U.S. Infrastructure Development Index. Fund holdings include construction and engineering companies. They also entail infrastructure raw material production, industrial transportation and heavy construction equipment distribution.
- Lazard Global Listed Infrastructure Port (GLIFX) – This fund seeks total return in the stock market. The bulk of funds invest in common stocks of infrastructure companies. They include utilities, railroads, airports, ports, telecommunications and airport industries.
- Nuveen Global Infrastructure Fund (FGIAX) – The Nuveen Global Infrastructure Fund has a dual goal of delivering long-term growth of capital and income. This fund invests in both U.S. and international companies, with up to 25% of fund assets invested in emerging markets infrastructure providers.
- Morgan Stanley Inst Glbl Infras Port (MTIPX) – MTIPX invests up to 100% of fund investments in foreign companies that are in the infrastructure sector. This is a non-diversified fund. Its investments focus on one specific sector or category within infrastructure.
- SPDR S&P Global Infrastructure ETF (GII) – This is an exchange-traded fund, meaning it trades on an exchange like a stock. GII seeks to match the total return performance offered by the S&P Global Infrastructure Index, which includes 75 of the largest publicly traded infrastructure companies in the U.S.
Advantages of an Infrastructure Fund
There are several reasons to like infrastructure fund as an investment tool. In terms of performance, these funds can offer stable returns over time. For instance, demand for infrastructure services and products tends to remain constant even during slower economic periods.
According to Morningstar, infrastructure funds as a whole generated an 8.41% 10-year average annual return through the fourth quarter of 2018. Though not as strong a performer as the technology or consumer discretionary sectors, infrastructure can still deliver respectable returns over time. In a down market cycle or recession, investing in infrastructure funds can be defensive. In other words, they tend to be less volatile than other market sectors.
Since roads, bridges and rail lines are tangible, they can generate cash flow over the long term if properly maintained. That cash flow can resist inflation and rising prices, due to the design of infrastructure contracts. For example, a shipping company that contracts with the government may have a clause built in that allows them to adjust rates when inflation rises.
Infrastructure funds also allow you to diversify beyond the typical mix of investments you might already own. While stock market movement can affect infrastructure somewhat, ifrastructure funds potentially offer more insulation against volatility when stock prices fluctuate. As a result, you can better manage risk in your portfolio.
These funds also benefit from lower rates of competition among service providers. In some instances, infrastructure providers may hold a monopoly over a certain geographic area or service. Or a government entity may grant a limited number of providers contracts to provide certain services. The high cost of development can also be a barrier to entry from smaller or newer. Consequently, all of the above offers a layer of protection to established infrastructure companies.
Infrastructure Fund Downsides
In investing, risk and reward tend to have a direct correlation. The riskier an investment is, the more rewarding it may be to investors.
Infrastructure funds are less risky by nature than funds that invest in growth stocks or tech, for example. While they can generate better yields than bonds or fixed-income instruments, infrastructure funds as a whole tend to lag behind S&P 500 returns.
Now, whether that’s an issue for you depends largely on your goals and objectives for investing in infrastructure funds. If you’re more interested in income from dividends than capital appreciation, for instance, then an infrastructure fund could be a good choice. For example, GLIFX offered a healthy dividend yield of 6.68%, as of December 2019. However, the typical dividend-paying fund tends to be in the 2% to 5% payout range.
Dividends can be a good source of supplemental income in a retirement portfolio. On the other hand, if you’re looking to make some quick gains then infrastructure funds may not be as suited to the task as another type of fund.
How to Invest in an Infrastructure Fund
You can invest in an infrastructure fund by purchasing shares through a taxable online brokerage account. You can also check your IRA or 401(k) fund options to see if infrastructure funds or ETFs are included.
As you compare funds, remember to look at the fund costs, including the expense ratio. Check how well a particular fund has performed historically and what it invests in, noting whether a fund is diversified or non-diversified.
Once you find a fund or two you’re interested in, compare that to the funds you already own to make sure there’s no overlap. It’s possible that you could have similar exposure to infrastructure companies if you already own some utility funds or ETFs, for example. You don’t want to become overweighted in any one sector, as that could throw off your asset balance and increase your risk profile.
The Bottom Line
An infrastructure funds represents the systems, products and services that are needed to keep the economy humming along. These funds can add stability to a portfolio, though they may not be appropriate for every investor. Taking into account cost, risk and performance is essential for choosing the right infrastructure funds to invest in.
- Consider talking to your financial advisor to learn more about infrastructure funds and how they can benefit your portfolio. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
- Consider an infrastructure fund’s dividend yield but don’t focus on it exclusively, as this number change over time and isn’t always guaranteed to increase. Dividend yield is just one part of the puzzle you can use to determine whether a particular fund is worth your time and money.
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