FlexShares STOXX® Global Broad Infrastructure Index Fund
Investors seeking income and portfolio diversification may benefit from infrastructure investments. Our analysis suggests that infrastructure issuers tend to have predictable cash flows as they provide essential services used in all economic environments. Infrastructure stocks carry both equity and interest rate exposure, and can provide an alternative source of income that may be attractive in a low interest rate environment.
In the chart below, our analysis suggests that by adding a 10% allocation funded from the equity portion of a hypothetical standard 60/40 portfolio into the STOXX Global Broad Infrastructure Index (STXGBIV), the resulting effect has been to reduce the overall portfolio exposure to US equity market beta* by an average of 7.4% from 1 November 2013 – 30 June 2019. A hypothetical standard 60/40 portfolio represents an investor investing 60% of their assets in the S&P 500 equity index and the other 40% in the Bloomberg Barclays US Aggregate Bond Index.
Direct infrastructure investments may require long lock-up periods when an investor may not have access to their original investment and may require a high initial investment. Investors who seek to access global infrastructure investments through a liquid vehicle may consider NFRA as an alternative. NFRA utilizes a bottoms-up portfolio construction approach that expands the traditional infrastructure definition and allows for a broader inclusion of new and evolving infrastructure sectors such as communications (data centers, wireless) and outsourced services. This broader diversification has historically helped NFRA to avoid large concentrations in other traditional sectors such as utilities.
Infrastructure assets may offer a way to protect against the risk of long-term inflation. When inflation rises, most infrastructure operators have historically passed through the cost increases to users per long-term contracts that typically underpin infrastructure business models. Since 2001, global listed infrastructure has been able to cover the inflation effects of high inflationary periods 82% of the time, outpacing more traditional asset classes like fixed income (62%), global equities (66%) and TIPS (70%).
*Beta is a measure of the volatility or risk, of a security or a portfolio in comparison to the market as a whole.
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FlexShares STOXX® Global Broad Infrastructure Index Fund (NFRA) is passively managed and uses a representative sampling strategy to track its underlying index. Use of a representative sampling strategy creates tracking risk where the Fund’s performance could vary substantially from the performance of the underlying index along with the risk of high portfolio turnover. It is subject to infrastructure-related companies risk and MLP risk. Risks associated with infrastructure-related companies include: realized revenue volume may be significantly lower than projected and/or there will be costs overruns; infrastructure project sponsors will alter their terms making a project no longer economical; macroeconomic factors such as low gross domestic product (“GDP”) growth or high nominal interest rates will raise the average cost of infrastructure funding; government regulation may affect rates charged to infrastructure customers; government budgetary constraints will impact infrastructure projects; and special tariffs will be imposed. Investments in foreign market securities involve certain risks such as currency volatility, political and social instability and reduced market liquidity. To the extent that the Fund invests in Emerging markets, those investments may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that country, market, industry, sector or asset class.
The STOXX® Global Infrastructure Index is the intellectual property (including registered trademarks) of STOXX® Limited, Zurich, Switzerland and/or its licensors (“Licensors”), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by STOXX® and its Licensors and neither of the Licensors shall have any liability with respect thereto.