Infrastructure ETFs offer hidden value

Infrastructure companies are having a strong year as investors find appeal in their safety and dividend power.

The S&P Global Infrastructure Index, which is a good proxy for the sector, has a year-to-date total return of 16% at the time of writing. That matches the S&P 500 Index, which is 16.6% higher though it lags the S&P/TSX Composite, which is up 22% on the year. The average yield of the Infrastructure Index is 2.91%, which is the same as the S&P/TSX.

The appeal of infrastructure companies to conservative income-seeking investors is that while they are slow growing, the companies represent the backbone of the global economy. They tend to be recession resistant and are often characterized by high levels of regulation. This limits their growth but acknowledges they have a monopoly or near monopoly businesses.

Looking ahead, the sector should benefit from downward pressure on interest rates. Canadian and US central banks cut their key rate by 0.25% in September. The Bank of Canada cut another 25 basis points to 4.25% on October 29.

Many Canadian names are included in the index. They include CN Rail (TSX: CNR), Canada’s largest freight railway, and Ontario’s Hydro One (TSX: H), which transmits the province’s electricity. Energy infrastructure companies include TC Energy (TSX: TRP) and Pembina Pipeline (TSX: PBA). Also included is Canada’s largest telecom company, BCE (TSX: BCE).

Another way to go is through ETFs. They offer geographic diversification by adding access to US, European, and emerging markets. Broadening the mix helps avoid the cyclical ups and downs or regulatory constraints that are specific to Canadian companies.

Here are updates on two infrastructure funds. Both have substantial Canadian components but include American and European holdings. Prices are as of the close on Nov. 3.

iShares Global Infrastructure Index ETF (TSX: CIF) Current price: $60.30

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. Most of its holdings are in Canada and the US. 

Performance: The fund’s total return year-to-date is 28%. The last time this fund lost money over a calendar year was in the Covid year of 2020 when it was down 0.2%.

Key metrics: The ETF was launched in August 2008 and has $867 million in assets. The MER is 0.72%.

Portfolio: The fund has about 42% of its holdings in the US and 35% in Canada. That is followed by Brazil (7%) and Chile (5%).  Half the companies (50%) are utilities. Canadian holdings in the top 10 include Stantec Inc., Atco Ltd., Transalta Corp., and Canadian Utilities Corp. They account for 12% of the fund.

Distributions: The annual payout of $1.32 is paid quarterly and can be taken as cash or reinvested through a dividend reinvestment plan. The ETF yields 2.28% at current prices.

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)  Current price: $51.70
Comments: This ETF was among the first ETFs launched by Bank of Montreal in 2009. A high portion of its holdings (93%) are based in Canada and the US.

Performance: The ETF’s total return is 1.1 % year-to-date and 4% in the last year.

Key metrics: The fund is passively managed and has $532 million in assets under management (AUM).

Portfolio: The ETF has 50 stocks. About 39% of holdings are energy pipelines and another 33% are electric utilities. About 70% of holdings are in the US, followed by Canada (21%).  The UK makes up 6%.

The top five holdings account for 35% of the ETF. The largest holding is Enbridge (9%) followed American Tower (8%), a Boston-based owner of wireless and broadcast communications infrastructure. Third is US natural gas pipeline company Williams Co.

Distributions. They are paid quarterly and can be taken as cash or reinvested through a dividend reinvestment plan. The latest payout was $0.34 per unit, which would work out to $1.36 a unit over a full year if it were maintained at that level. Since the start of 2024, the quarterly payment has ranged from $0.34 to $0.37 per unit.

Risks: This ETF has a higher North American weighting than the iShares Global ETF and so rises and falls with the domestic economies. The iShares ETF offers more diversification.

This ETF is a conservative way to invest in Canadian and American firms that form the backbone of the North American economy.

This article appeared in a recent issue of the Income Investor.  For information on how to reprint this article please view this page