Alternative Strategy ETFs Part 2: Infrastructure ETFs

Non-traditional ETFs can provide a better risk adjust return for your portfolio.

In part 1 we discussed covered call ETFs. Now we look at another interesting alternative strategy available as though ETFs, Infrastructure.

Do-it-yourself investors have often gravitated to the simplicity of the couch potato portfolio, which includes bonds and global equities in a simple easy to manage portfolio that uses only a few exchange traded funds (ETFs). ETFs are just like mutual funds except they are traded like stocks and come without extra costs like embedded sales commissions.

While couch potato portfolios are easy to setup and use, many investors may find their not 100% comfortable their high market correlation and hence market volatility. Successful money managers and pension funds typically minimize volatility and risk through diversification into uncorrelated “alternative” asset classes. Now, thanks to an explosion in the number and types of ETFs available, even DIY investors can consider some alternative asset classes for their own portfolios.

One alternative that is worth consideration is infrastructure. The underlying investments typically focus on the development of bridges, roads, pipelines and utilities. Infrastructure typically exhibits these positive investment characteristics:

  • Consistent returns and stable and predictable cash flows
  • Lower sensitivity to swings in the economy and markets
  • Lower correlation to the market which helps reduce portfolio volatility
  • Good as an inflation hedge

Retail investors can access infrastructure through two publicly available Canadian infrastructure ETFs (iShares Global Infrastructure CIF & BMO Global Infrastructure ZGI), which have both demonstrated better-than-market risk adjusted returns and low correlation.

iShares Global Infrastructure (CIF) and BMO Global Infrastructure (ZGI) each differ somewhat in the index they track. CIF tracks the Manulife Asset Management Global Infrastructure Index, a fundamentally weighted index made up of the top globally listed companies in the infrastructure sector. ZGI tracks the Dow Jones Brookfield Global Infrastructure North American Listed Index, a simpler market capitalization weighted index of North American listed companies whose cashflows are derived from infrastructure.

Holdings, Geographic Exposure & Sectors

ZGI CIF
Positions 48 60
Canada 20% 20%
US 70% 59%
International 10% 21%
Real Estate 7% 0%
Communication Services 7% 0%
Energy 45% 26%
Industrials 1% 37%
Utilities 39% 33%
Basic Materials 0% 3%

Source: MorningStar April 2015

CIF has a larger international exposure and invests primarily in three sectors: Energy, Industrials and Utilities. ZGI is more North American focused and is concentrated mostly in Energy and Utilities.

Both have demonstrated better risk adjusted returns (indicated by a higher Sharpe Ratio) than a typical S&P/TSX Composite tracking ETF. They also have relatively low correlation to Canadian equities.

infrastructure_performance
Source: MorningStar April 2015

When choosing an ETF to represent this asset class, other important considerations are fees, total assets and liquidity. CIF’s fees (MER) are higher at 0.72% vs 0.10% for ZGI. ZGI also holds far more assets ($332m vs. $48m) and hence provides better liquidity. High liquidity means a narrower spread between bid and ask prices, making it easier to buy and sell the ETF at a price closer to its NAV.

Both CIF and ZGI have been available for over 5 years. Over that time ZGI’s market capitalization index methodology has significantly out-performed its peer. It has done so with lower volatility and with a much lower correlation to the equities market. These are all good properties to look for when looking to choose an alternative asset class ETF to minimize portfolio volatility and create a more resilient “all weather” portfolio.

Of course, DIY investing and asset allocation isn’t for everyone. If you’re looking professional financial advice and simple investing WealthBar can help.