Infrastructure ETFs offers hidden value

Conservative investors looking for portfolio anchors often turn to infrastructure companies  because they like the combination of safety and reliable dividend streams.

These slow growing giants are economic backbone. They offer unspectacular growth but are insulated from recession. Many are regulated monopolies which means a captive customer offering predictable growth.

These companies supply essential services which usually only notice when they go missing. But when they do have problems, boy do we do notice!  Calgary residents are advised to boil water and skip showers after a major water main rupture that will take weeks to fix. Long suffering Toronto commuters have seen their daily frustration quotient, which was already high, go off the scale. They are coping with lane reductions on the Gardiner Expressway, the major artery through the city. The pain will continue until mid-2027 for what officials say is a critical rehab of a 60-year-old highway.

As the Dow and TSX have hit new highs infrastructure companies have held their own, even though they are interest rate sensitive. They have matched, and in some cases exceeded, the gains of both indexes even though the high cost of borrowing is a drag on their earnings. The S&P Global Infrastructure index which is a good proxy for the sector has a year-to-date total return of 6.7% versus 5.8% for the TSX Composite.

The Bank of Canada’s quarter point rate cut gave the sector a bump. Bank of Canada governor Tiff Macklem said rates will continue to fall slowly if inflation remains benign.

“If inflation continues to ease…it is reasonable to expect further cuts. But we are taking our interest-rate decisions one meeting at a time,” he said.

 Here are two infrastructure funds who will benefit from an easing of monetary policy.  

Ishares Global Infrastructure Index ETF (TSX: CIF)

Background: This ETF has been a top performer since its launch in 2008. It offers a global  exposure to companies in the transportation, water and electricity services sectors. The majority of its holdings are in Canada and the U.S. 

Performance:  The fund’s total return is 12.5% year-to-date at the current price of $42.55.

Key metrics:  The ETF has $458 million in assets with about 45% of its holdings in the US and 32% in Canada.

Portfolio: Almost half the companies are utilities. Canadian holdings in the top 10 include Atco Ltd.,  Stantec Inc., Transalta Corp. and Gibson Energy.

Dividends: Distributions are paid quarterly and can be taken as cash or reinvested through its dividend reinvestment plan. The current yield is 2.57%.

 This fund captures opportunities outside North America but still keeps its focus close to home. That offers a broad reach, but a lot of safety. It offers a DRIP program for those  who want their dividends paid as shares rather than cash.

 BMO Global Infrastructure Index (TSX: ZGI) 

Comments: This ETF was among the first ETFs launched by Bank of Montreal in 2009. It is passively managed and has $619 million in assets under management (AUM). An even higher portion of its holdings (93%) are based in Canada and the U.S.

Performance: The ETF is 3% higher year-to-date and 5% in the last year.

Dividends:  The fund has an annualized dividend yield of 3.2% at its recent price.

Key Metrics: The ETF has 50 stocks and is passively managed. About 39% of holdings are energy pipelines and another 33% are electric utilities.

About 73% of holdings are in the U.S., followed by Canada (19%), which is somewhat higher than ZGI. The UK makes up (5%).

The top five holdings making up 30% of the ETF. The largest is American Tower (9%), a Boston-based owner of wireless and broadcast communications infrastructure, followed by Canadian pipeline utility Enbridge (8%).

This ETF has a higher North American weighting than the iShares global ETF and so rises and falls with these domestic economies. It is a conservative way to invest in Canadian and American firms that form the backbone of the North American economy.

This article appeared in The Income Investor newsletter on Apr. 22, 2024.  For information on how to reprint this article please view this page.