One of the interesting opportunities that exchange traded funds (ETFs) offer is to allow investors to play themes, such as natural resources, infrastructure or food. Infrastructure ETFs may be particularly interesting to Investors Chronicle readers, given the prevailing high premiums on infrastructure investment trusts.
Because of their attractive attributes - for example, high levels of relatively secure income and inflation protection - infrastructure investment trusts have traded at high premiums to their underlying net asset values for several years.
Infrastructure investment trusts are the only way for private investors to get direct exposure to infrastructure projects. However, if you buy something overvalued it is likely you won't make as much money on it and you haven't got as much margin of safety if the market goes against you. So investors looking for alternatives to infrastructure investment trusts may be attracted to ETFs that hold stocks involved in infrastructure development. Although they don't offer direct exposure to infrastructure projects, infrastructure ETFs' total expense ratios (TERs) tend to be cheaper than those of the investment trusts.
Adam Laird, the head of passive investments at Hargreaves Lansdown, sums up the justification for investing in infrastructure: "The developed world needs to spend more on infrastructure to keep its economic productivity high. Many developed countries built their transport networks and public facilities after the Second World War and it is costing more to repair and replace installations. At the same time, wealth is spreading in emerging countries. As citizens become richer, they want access to facilities that we in the west have and they are demanding this investment from their governments. The governments realise that these are not simply modern conveniences, but essential to support their economic development."
Investors may first want to look at a broad global infrastructure ETF such as db x-trackers S&P Global Infrastructure (XSGI), which tracks the S&P Global Infrastructure index of around 75 companies from around the world that represent the listed infrastructure universe. The utilities and transportation sectors are each represented by 30 companies in the index and the energy sector is represented by 15 companies. The ETF uses synthetic replication to capture the performance of the index and the TER for this product is 0.6 per cent. This ETF reinvests income rather than distributing it to investors.
Alternatively, iShares Global Infrastructure UCITS ETF (INFR) aims to track the performance of the Macquarie Global Infrastructure 100 Index, which offers exposure to the 100 largest stocks from developed and advanced emerging countries of the Macquarie Global Infrastructure Index, measured by market capitalisation. The ETF invests in physical index securities and has a TER of 0.65 per cent. It has a distribution yield of 2.93 per cent.
Mr Laird says: "Both have tracked their index quite closely. Be warned however - iShares has performed worse than db over its six-year life, as its index has. db's index has fixed allocations to each infrastructure type."
Alternatively, investors may want to consider some relatively new ETFs that invest in Master Limited Partnerships (MLPs). A type of listed US partnership, MLPs derive 90 per cent of their profits from real estate, natural resources or commodities. Mr Laird says: "They tend to be on the infrastructure side - pipelines, roads, processing plants. MLPs can be structured to either hold the fixture, or run a maintenance contract on it. They've got a tax advantage in the US, but in the UK are popular because of high income. MLPs are an interesting prospect for investors and provide exposure to projects that investors cannot access through other ETFs."
The two US energy infrastructure ETF products below are structured for their income potential and both are replicated using synthetic replication.
ETFS US Energy Infrastructure MLP GO UCITS ETF (MLPX) listed in May 2014. It tracks the Solactive US Energy Infrastructure MLP Index, which is an equally weighted index providing diversified exposure to the 'midstream' segment of the US energy infrastructure market by only including MLPs defined as infrastructure MLPs. It selects 25 MLPs chosen by forward-looking dividend yield and dividend stability. MLPX has a TER of 0.45 per cent and distributes dividends on a quarterly basis.
Source Morningstar US Energy Infrastructure MLG UCITS ETF B (MLPS for Income Accumulated or MLPD for distributed) launched on 15 May 2013. It aims to provide the performance of the Morningstar MLP Composite Index, which targets the top 97 per cent of MLPs by market capitalisation. The index is weighted by dollar value of annual distribution and caps individual constituents at 10 per cent. It has a TER of 1.25 per cent (0.5 per cent annual management charge plus 75 per cent swap fee).
