As the world economy enters the late innings of an expansion of record length, infrastructure as an investment has taken on a new appeal. In good times or bad, we all use roads and need electricity or natural gas to heat our homes.
These ETFs offer mainly developed market opportunities. There is a crossover in their holdings, but one is almost exclusively focused on Canada and the U.S. while the other has a more international flavour.
BMO Global Infrastructure Index (TSX: ZGI). Closed Fri. Feb. 15 at $36.65.
Background: This was the first ETF launched by Bank of Montreal in 2010 and is a good-sized fund with $222 million in assets. It offers reasonable liquidity and passively follows the Dow Jones Brookfield Global Infrastructure North American Listed Index, with weightings based on the market capitalization of the stocks in the index.
Chris McHaney, a director and portfolio manager with BMO Asset Management, says the fund fits as part of a balanced portfolio. He believes it provides a blend of conservative growth and a steady stream of income.
McHaney says the ETF has a low correlation with the stock market, which means it does not move in sync with the ups and down of the broader market. Revenues and profits are consistent in all conditions and so the underlying share prices is less volatile. In good times and bad we always need these products.
“It’s a good diversifier and fits into any long-term portfolio including RRSPs,” McHaney says.
Performance: The ETF has been a solid performer, with an average annual rate of return since inception of 12.29%. It is up 7.47% year to date and has a five-year average rate of return of 8.48%. That compares favourably with the S&P 500 Index, which also has a five-year average annual return of 8.48%.
The fund has a trailing 12-month dividend yield of 2.81% at its recent price and a management expense ratio of 0.61% .
Holdings: ZGI has 92% of its holdings in Canadian and American companies and a 98% weighting in utilities, energy transmission, and real estate. Companies must have a market capitalization of at least US$500 million and must trade on North American exchanges or as American Depository Receipts (ADRs), which are U.S. listings of non-North American companies.
ZGI had 45 stocks as of Jan. 31, broken down as 67% in the U.S., 25% in Canada, 6% in the U.K., and 2% in Latin America. The holdings were 40% in utilities, 27% in energy, and 31% in real estate.
The largest single holding is Canadian pipeline utility Enbridge (11.3%). It’s followed by American Tower (10.2%), a Boston-based owner of wireless and broadcast communications infrastructure. Other top holdings are Crown Castle International., a U.S. cell tower firm (7.35 %); National Grid PLC, a British utility (6.03%); and Canadian pipeline operator TransCanada (5.94%). The top five holdings make up 37% of the ETF.
McHaney notes that the bulk of the real estate holdings are in companies that own cell phone towers and so stand to benefit from upgrades to handle so-called 5G, or 5th generation cellular transmissions.
He agrees that emerging markets needs for infrastructure are great but believes the opportunities closer to home are as appealing. The investable companies are mature, well-financed, their affairs are transparent, and they have proven track records.
Action now: Buy. This ETF is a conservative way to invest in Canadian and American firms that form the backbone of the North American economy.
iShares Global Infrastructure ETF (NDQ: IGF) Closed Fri. Feb.15 at $43.86. All figures in U.S. dollars.
Background: This ETF was launched in 2007 and holds 86 global stocks in the transportation, communication, water, and electricity services sectors. Five Canadian energy firms are included in the holdings.
Performance: This ETF was launched in the lead up to the 2008 financial crisis and lost almost half its value between May 2008 and June, 2009. In the decade since, it has been a steady performer with a 10-year total return since to Dec. 31 of 92.87%. This includes the increase in its share price and distributions. The ETF fell 10.2% in 2018 as a fears of rising interest rates dampened enthusiasm for utilities.
Holdings: While ZGI focuses on North America, IGF is more broadly based, with holdings in Latin America, Europe, Australia, and a small position in China. The top five countries account for 71% of holdings led by the U.S. (37.4%), Australia (9.5%), Canada (8.7%), Italy (8.2%), and Spain (7.5%).
The sector weighting are utilities (43%), transportation (39%), and energy (18%).
The top five stocks as of Jan. 31 are Australian industrial firm Transurban Group (5.26%), Spanish industrial Aena Sme SA (4.7%), Enbridge (4.42), American utility Nextera Energy (4.19), and Italian industrial Atlantia (4.09). The top 10 holdings account for 35.6% of the value of the ETF.
The ETF has net assets of $2.4 billion, an expense ratio of 0.47%, a p/e ratio of 18.3, and a trailing 12-month yield of 3.25%.
Action now: Buy. This ETF is more broadly diversified than ZGI, with a smaller portion of holdings in North America. It is also less heavily weighted towards energy, adding a transportation component. Like ZGI, it offers the potential for capital appreciation and dividend income. It adds balance to most portfolios with the addition of exposure in Europe and Australia.
Choose this ETF if you want more international exposure. Go with ZGI if you would prefer to focus on North America.
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(These ETFs were recommended in the Feb. 18, 2019 issue of the Internet Wealth Builder investment newsletter.)