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Infrastructure investing was once the exclusive domain of pension plans and foundations, which have long understood the diversification benefits and investment opportunities provided by the asset class. Now, however, infrastructure investing is accessible to everyday investors through a range of innovative investment products, including active ETFs.
Infrastructure has received increased attention recently as governments around the world look to repair crumbling infrastructure and jumpstart growth in the wake of the COVID-19 pandemic. Aging infrastructure, population growth, urbanization, strong data consumption, and the demand for renewable power – just to name a few – have created a tremendous long-term growth opportunity.
If you think you missed the boat on infrastructure investing, think again: The McKinsey Global Institute has estimated that from now until 2030, the investment in global infrastructure projects required to support anticipated growth rates is about US$3.3 trillion a year.1
Infrastructure is generally considered an alternative asset because it doesn’t fit into the category of traditional investments like stocks, bonds, and cash. It’s less correlated to equities and bonds, and therefore infrastructure assets can potentially provide strong diversification across multiple levels – by geography, type, industry and even by market-capitalization. For example, there’s very little correlation between a basket of North American equities and a toll road in Europe, or a power plant in Singapore.
Infrastructure assets typically operate in monopoly-like environments – with high barriers to entry, strong pricing power, and limited competition. They often provide access to predictable cash flows – especially appealing in today’s environment as investors increasingly look for stable income. In today’s low-yield environment, every basis point counts.
The infrastructure sector generally includes four key sub-sectors: Transport – ports, airports, bridges, tunnels, parking; Utilities – energy, distribution, power generation, water treatment; Communication – towers, satellites, wireless, and cable networks; Renewable energy – solar and wind power, electric vehicles, and batteries.
Speaking of renewable energy, it’s hard to overlook the investment opportunities being created as companies around the globe transition away from fossil fuels to more sustainable, lower-carbon energy sources. Investing in a broad infrastructure mandate can provide a great way to take part in the renewable power story.
By optimizing portfolio diversification and providing investors with the broadest set of investment opportunities, a global infrastructure mandate has the potential to increase investors’ ability to achieve higher risk-adjusted portfolio returns over the long term. It’s important to note that during times of market stress, diversification across non-correlated assets can position investors for exceptional growth during a market recovery.
As more investors turn to ETFs to form a part of their investment plan, the demand for active management within the structure has increased. Actively managed ETFs can help meet this demand as they can potentially differentiate client portfolios by uncovering opportunities beyond the benchmark. For example, the Dynamic Active Global Infrastructure ETF (TSX: DXN) invests in a diversified portfolio of publicly traded companies from around the globe that own infrastructure assets directly with the aim of delivering lower correlated returns.
1 “Bridging global infrastructure gaps,” The McKinsey Global Institute, June 14, 2016.
Alan Green is Director, ETF Capital Markets, at Dynamic Funds. This article previously appeared in the Winter 2021 issue of Your Guide to ETF Investing, published by BrightsRoberts Inc. Used with permission.
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