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Infrastructure: An Alternative Asset Class Built to Last

Chris Heakes

Infrastructure: An Alternative Asset Class Built to Last

Snapshot
With the U.S. election hot on the heels of a volatile 2019, we see value in a strategy that levers infrastructure stocks as a complement to a traditional equity-bond portfolio. Regardless of the election outcome, bipartisan support for investment in the asset class ensures new demand in a defensive sector already experiencing significant growth – in both developed and emerging economies.   

Case in point: according to McKinsey Global Institute, the world needs to invest $3.7 trillion in economic infrastructure annually through 2035 to keep pace with projected growth driven by secular megatrends – or $69.4 trillion total.1

Investors looking to leverage the anticipated demand and benefit from the special characteristics of the asset class – including downside protection relative to broad equities – should consider BMO Global Infrastructure Index ETF (Ticker: ZGI).

Details
BMO Global Infrastructure Index ETF (Ticker: ZGI)

Benefits

  • Defensive investments – maintaining high upside capture, while providing robust downside protection when markets fall
  • Portfolio diversificationlow correlation to broad equities, improving risk-adjusted returns and portfolio construction
  • Sustainable, predictive income – historically stable cash flows (essential services) results in attractive dividend yields and long-term potential
  • Inflation-hedged returns – many infrastructure assets have the ability to pass inflation through to customers based on regulated contract provisions

Trade Idea
When comparing BMO Global Infrastructure Index ETF to broad market indices, ZGI has shown strong upside and downside capture during periods of market volatility. This capital preservation is a result of long-term exposure to economically insensitive, inflation-protected cash flows, which is a fundamental reason why the asset class is complementary to broader equities. Amid the current market uncertainty, there could be increased demand from clients for solutions that provide stable growth, income, and downside protection. Offering lower correlation to broad markets, ZGI represents a practical tool Advisors can offer to further diversify portfolios, for improved, and more balanced, overall construction.

ZGI Demonstrates Defensive Qualities vs. Broad Markets

S&P/TSX S&P 500
Beta of ZGI to Index 0.65 0.40
Upside Capture 83% 48%
Downside Capture 41% 33%
Correlation 0.51 0.44

Source: Bloomberg; upside/downside, 5-year data as of September 30, 2019; beta and correlation 2-year as of October 29, 2019.

ZGI also has a solid income stream, with a gross dividend yield of 3.84%, compared to 3.15% for the S&P/TSX, and 1.89% for the S&P 500.2

ZGI Delivers Solid Returns Over the Long Term

ETF Ticker ETF Name 1M 3M 6M 1Y 3Y 5Y Since Inception Since Inception Date
ZGI BMO Global Infrastructure Index ETF 1.1% 5.2% 7.3% 21.0% 7.5% 8.4% 13.7% 21/01/2010
ZCN BMO S&P/TSX Capped Composite Index ETF 1.7% 2.5% 5.1% 7.1% 7.3% 5.3% 6.9% 04/06/2009
ZSP BMO S&P 500 Index ETF 1.3% 2.8% 5.0% 6.5% 13.3% 14.1% 18.6% 20/11/2012

Source: BMO Global Asset Management as of September 30, 2019. Returns are annualized where the period is greater than 1 year. 

ZGI Performance vs. Broad Markets Over a 7-Year Period

Nov-2019-Heakes-Chart-1a.jpg#asset:3478

Source: Bloomberg, November 19, 2012 – October 29, 2019.

ZGI Outshines Broader Markets During Q4 2018

Nov-2019-Heakes-Chart-2a.JPG#asset:3479

Source: Bloomberg, September 28, 2018 – December 31, 2018.

Outlook
With global equity markets vulnerable to increased volatility, heightened uncertainty on trade, and monetary policy and geopolitical issues, implementing a defensive strategy that adds exposure to global infrastructure equities helps protect returns going forward, and provides access to stable, long-term capital growth. As demand continues to flourish for infrastructure amid the U.S. election backdrop, this apolitical, income-focused asset class will surely play an increasingly prominent role in enhancing portfolio construction, and improving client outcomes. 

 

 

1 McKinsey Global Institute, Bridging Infrastructure Gaps: Has the world made progress? October, 2017.

2 Bloomberg, dividend yield as of October 29, 2019.

Chris Heakes

Infrastructure: An Alternative Asset Class Built to Last

Snapshot
With the U.S. election hot on the heels of a volatile 2019, we see value in a strategy that levers infrastructure stocks as a complement to a traditional equity-bond portfolio. Regardless of the election outcome, bipartisan support for investment in the asset class ensures new demand in a defensive sector already experiencing significant growth – in both developed and emerging economies.   

Case in point: according to McKinsey Global Institute, the world needs to invest $3.7 trillion in economic infrastructure annually through 2035 to keep pace with projected growth driven by secular megatrends – or $69.4 trillion total.1

Investors looking to leverage the anticipated demand and benefit from the special characteristics of the asset class – including downside protection relative to broad equities – should consider BMO Global Infrastructure Index ETF (Ticker: ZGI).

Details
BMO Global Infrastructure Index ETF (Ticker: ZGI)

Benefits

  • Defensive investments – maintaining high upside capture, while providing robust downside protection when markets fall
  • Portfolio diversificationlow correlation to broad equities, improving risk-adjusted returns and portfolio construction
  • Sustainable, predictive income – historically stable cash flows (essential services) results in attractive dividend yields and long-term potential
  • Inflation-hedged returns – many infrastructure assets have the ability to pass inflation through to customers based on regulated contract provisions

Trade Idea
When comparing BMO Global Infrastructure Index ETF to broad market indices, ZGI has shown strong upside and downside capture during periods of market volatility. This capital preservation is a result of long-term exposure to economically insensitive, inflation-protected cash flows, which is a fundamental reason why the asset class is complementary to broader equities. Amid the current market uncertainty, there could be increased demand from clients for solutions that provide stable growth, income, and downside protection. Offering lower correlation to broad markets, ZGI represents a practical tool Advisors can offer to further diversify portfolios, for improved, and more balanced, overall construction.

ZGI Demonstrates Defensive Qualities vs. Broad Markets

S&P/TSX S&P 500
Beta of ZGI to Index 0.65 0.40
Upside Capture 83% 48%
Downside Capture 41% 33%
Correlation 0.51 0.44

Source: Bloomberg; upside/downside, 5-year data as of September 30, 2019; beta and correlation 2-year as of October 29, 2019.

ZGI also has a solid income stream, with a gross dividend yield of 3.84%, compared to 3.15% for the S&P/TSX, and 1.89% for the S&P 500.2

ZGI Delivers Solid Returns Over the Long Term

ETF Ticker ETF Name 1M 3M 6M 1Y 3Y 5Y Since Inception Since Inception Date
ZGI BMO Global Infrastructure Index ETF 1.1% 5.2% 7.3% 21.0% 7.5% 8.4% 13.7% 21/01/2010
ZCN BMO S&P/TSX Capped Composite Index ETF 1.7% 2.5% 5.1% 7.1% 7.3% 5.3% 6.9% 04/06/2009
ZSP BMO S&P 500 Index ETF 1.3% 2.8% 5.0% 6.5% 13.3% 14.1% 18.6% 20/11/2012

Source: BMO Global Asset Management as of September 30, 2019. Returns are annualized where the period is greater than 1 year. 

ZGI Performance vs. Broad Markets Over a 7-Year Period

Nov-2019-Heakes-Chart-1a.jpg#asset:3478

Source: Bloomberg, November 19, 2012 – October 29, 2019.

ZGI Outshines Broader Markets During Q4 2018

Nov-2019-Heakes-Chart-2a.JPG#asset:3479

Source: Bloomberg, September 28, 2018 – December 31, 2018.

Outlook
With global equity markets vulnerable to increased volatility, heightened uncertainty on trade, and monetary policy and geopolitical issues, implementing a defensive strategy that adds exposure to global infrastructure equities helps protect returns going forward, and provides access to stable, long-term capital growth. As demand continues to flourish for infrastructure amid the U.S. election backdrop, this apolitical, income-focused asset class will surely play an increasingly prominent role in enhancing portfolio construction, and improving client outcomes. 

 

 

1 McKinsey Global Institute, Bridging Infrastructure Gaps: Has the world made progress? October, 2017.

2 Bloomberg, dividend yield as of October 29, 2019.