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Accessing Infrastructure: Meeting the Challenge with an ETF

We expect infrastructure investing to continue expanding in the coming decades, but access can be challenging for many investors. Most liquid alternatives that seek to act as a proxy for the performance of this asset class are imperfect, with a high equity beta that renders them unsuitable to park ‘dry powder.’ An ETF provides a potential solution to these challenges.

ETF Strategist

Future Infrastructure Investment Requirements

Infrastructure assets represent the basic physical systems of a nation and therefore they are vital to a country’s economic development and prosperity. However, the Global Financial Crisis and, more recently, the coronavirus crisis have led to an imbalance between infrastructure needs and funding.

At a time when economies need it most, traditional sources of capital are under pressure. This is not merely a European problem — A McKinsey report from June 2016 estimated that global spending on infrastructure would need to rise from $2.5 trillion to $3.3 trillion per year until 2030 in order to keep up with demand. OECD estimates, noted in a June 2017 report, were even more aggressive, putting the projected annual figure at $6.3 trillion.*

Click here to read more about the future of infrastructure investing.

A Challenge and a Solution

Infrastructure offers investors a range of potential benefits. Most notably, the asset class provides the potential for long-term, steady returns and predictable cash flows (see Figure 1). However, many investors lack the scale to invest in unlisted infrastructure or directly into debt securities, making it difficult for smaller investors to gain exposure to infrastructure.

Figure 1: Infrastructure Investment Attributes

Attribute

Investment Benefit

Industry Example

Monopolistic

High barriers to entry: initial capital outlay and strict regulations

Revenue streams are protected

Toll roads, airports, railroads

Regulated utilities: electricity, gas, water

Oil & gas pipelines

Satellites

Inelastic Demand

Less sensitive to business cycle

Electricity, gas, water

Towers, satellites

Social infrastructure

Predictable Long-Term Returns

Assets are long-lived

Steady user demand

Reliable cash flows

Toll roads

Regulated utilities: electricity, gas, water

Oil & gas pipelines

Inflation-Linked

Real assets: long-term asset appreciation, in line with inflation

Concessions permitting rent escalations linked to inflation

Toll roads, airports, railroads

Regulated utilities: electricity, gas, water

 

Source: State Street Global Advisors.

ETFs provide one way to address this challenge by offering a regulated, open-ended vehicle to access infrastructure. A liquid ETF also helps larger investors, who could access direct infrastructure, by providing a temporary home for committed, but uncalled, capital (i.e. dry powder). An ETF structure does not offer a like-for-like substitute for long-duration infrastructure exposure, but low capital requirements and high liquidity and diversification make it a relatively attractive addition to the infrastructure toolkit in any portfolio.

An ETF vehicle allows investors to potentially benefit from a risk-adjusted return profile that resembles direct investment in the underlying asset, but without the liquidity and cost issues otherwise associated with direct infrastructure investment.

How to Access this Theme

The SPDR Morningstar Multi-Asset Global Infrastructure UCITS ETF can provide investors with an avenue for accessing the infrastructure asset class. To learn more about the ETF, and to view a full performance history, please click here .

*The above targets are estimates based on certain assumptions and analysis. There is no guarantee that the estimates will be achieved.