Retail clients — unlike pension funds and other large institutional investors — can’t invest directly in an airport, a power plant or a toll highway. What they can invest in are managed investment funds, including the six Canadian-listed ETFs in the global infrastructure equity category. More diversified than sector-specific mandates, these ETFs also tend to be less volatile and higher-yielding than the broader market.
The largest in its peer group is the $294-million AGFiQ Enhanced Global Infrastructure ETF, which launched in February 2018. Florence Narine, senior vice president and head of product with Toronto-based AGF Investments Inc., says the ETF addresses the need for investors and their advisors to have access to multiple building blocks to fully diversify portfolios and provide additional sources of income.
Reflecting their income-oriented nature, global infrastructure ETFs make distributions at least quarterly. Two of them – RBC Quant Global Infrastructure Leaders ETF and Starlight Global Infrastructure Fund – distribute income monthly.
Unlike institutional funds, an infrastructure ETF cannot buy physical assets, says Narine. “So, the closest thing we went to is the listed securities, which is not going to give some of the yield that you will see in a physical property, but [is] quite close.”
The AGFiQ ETF’s portfolio, consisting mainly of securities in the utilities, energy, real estate and industrials sectors, currently yields about 4%. “That’s quite attractive, given where [fixed-income] rates are today,” Narine says.
Infrastructure-type equities tend to have a low correlation to other equities, says Chris McHaney, director and portfolio manager, BMO ETFs, with Toronto-based BMO Asset Management Inc. “As a portfolio building block, they do a really good job from the diversification standpoint.” While these stocks also are constituents of broad market indices, their weights tend to be lower.
“Having a dedicated sleeve to infrastructure allows the portfolio to have a decent weight in these holdings,” adds McHaney, whose firm manages the $250-million BMO Global Infrastructure Index ETF.
“In general, infrastructure equities tend to be a little less volatile than the broad market, so they’re a bit more defensive,” McHaney says. “So you might find a higher allocation in a defensive-minded investor’s portfolio. A more risk-averse investor might have a higher weight than a growth investor might.”
BMO’s offering, whose market benchmark is the Dow Jones Brookfield global infrastructure North American listed index, is the larger of the two infrastructure ETFs that are passively managed. The other is the $61-million iShares Global Infrastructure Index ETF, the oldest in the category, whose benchmark is the Manulife Asset Management global infrastructure index.
AGF’s ETF pursues a strategic beta approach, employing quantitative screens to select about 80 stocks from its benchmark index. The ETF’s holdings are drawn from the Dow Jones Brookfield global infrastructure index, which consists largely of U.S. stocks but is more geographically diversified than the index that the BMO ETF uses.
The proprietary AGFiQ model ranks stocks according to multiple factors that identify growth, value, quality and risk characteristics, while also imposing constraints in relation to diversification by industry sectors and individual holdings. The sector constraint, for example, is plus or minus five percentage points compared with the index. The $43-million RBC ETF also is factor-based. The $26-million NBI Global Real Assets Income ETF and the $3-million Starlight ETF, the two newest contenders, both give their active managers the discretion to select securities as they see fit.
Along with their generally above-average yields, infrastructure equities also can be growth plays. A white paper by Toronto-based RBC Global Asset Management Inc., released in September 2016 in conjunction with the launch of its ETF, stated that the world would need more than US$50 trillion in infrastructure spending in the next 20 years to simply keep up with GDP growth. Future prospects, the paper says, “are driven not only by the need to maintain aging assets, but by the need to develop new assets that will better position economies to harness the growth potential coming from new technologies.”
Within North America, where more than 90% of the BMO ETF’s assets are invested, much of the existing infrastructure is aging and needs replacement, McHaney says. “It’s one of the few areas [where] different political parties actually agree that a significant investment is required.”
In addition to more traditional infrastructure, the rapid growth of wireless communications has sparked spending by the private sector. Among the top holdings of both the AGF and BMO funds are Boston-based American Tower Corp. and Houston-based Crown Castle International Corp., which own and lease cellular towers and related infrastructure.
Infrastructure equities, with their emphasis on well-established profitable businesses, have done reasonably well. The average 10-year return of retail funds in this category, consisting of mutual funds plus the lone ETF that has been around that long, is 10.8% as of April 30, 2019, according to Morningstar Canada. That’s slightly higher than the 10.6% average for global equity funds during the same period.
As for fees, the low-cost provider is AGF, whose management fee of 0.45% undercuts both of the passively managed ETFs. At the high end in the category are the actively managed NBI and Starlight ETFs, both of which charge a management fee of 0.90%.
AGF’s fee is 10 basis points (bps) lower than what the BMO index ETF charges, and 20 bps lower than the management fee of the iShares ETF, the other index strategy. Noting that there’s a trend of fee compression in the ETF industry, Narine says AGF didn’t want to launch the ETF at a fee level that it would have to drop in order to remain competitive. “We wanted consistency of pricing.”