CIBC World Markets analysts Jin Yan, Ian de Verteuil, Shaz Merwat, and Jinzhu Zhai discuss the issue of revitalizing aging infrastructure. It has also been a priority for policy-makers in developed economies.
Per the Global Infrastructure Hub, G20 countries are expected to face a substantial investment gap when it comes to their infrastructure spending needs over the coming decades. The current annual shortfall is roughly US$500 billion, and the cumulative gap is expected to reach US$15 trillion by 2040, according to the group.
The investment gap is likely to at least be partially met by incoming government stimulus packages such as the US$1.2-trillion bipartisan Infrastructure Investment and Jobs Act signed into law last November. More recently, the EU has also announced plans to raise 300 billion euros to develop infrastructure as a response to China’s growing influence through its Belt and Road project.
Looking closer to home, the Canada Infrastructure Bank was established in 2017 to provide financial support for domestic infrastructure projects and invest $35 billion over 11 years in revenue-generating projects.
The increased stimulus spending should certainly benefit private-sector infrastructure companies and drive growth in the industry. Infrastructure companies also tend to be more defensive as their business models are less impacted by cyclical factors. Their returns are generally less correlated with the broader market, thereby providing some diversification benefits particularly during market corrections.
Canadian ETFs that build globally
The Canadian ETF marketplace is home to a host of Global Infrastructure ETFs. These ETFs invest in listed securities across a number of sectors which typically are more defensive and less volatile. These include companies in the Utilities, Energy (Midstream), Real Estate, and Industrials sectors for the most part.
The iShares Global Infrastructure Index ETF (TSX—CIF) and BMO Global Infrastructure Index ETF (TSX—ZGI) were the first infrastructure ETFs introduced in Canada, and both have more than 10 years of performance history.
We compared CIF and ZGI’s performance against the MSCI ACWI Net Return Index (CAD) during previous market corrections. We note that ZGI has done particularly well during periods of market drawdowns, having outperformed broad equity benchmarks in nearly all of these periods.
The only exception was during the pandemic-driven correction of early 2020, when the energy sector was impacted disproportionately and the ETF’s allocation to energy infrastructure companies drove its underperformance.
How these ETFs fit in your portfolio
Our next question was, what roles do these ETFs play in a portfolio? We found that by allocating a small percentage of a North American equity portfolio to either CIF or ZGI, the added position had the impact of improving the portfolio’s yield and reducing its volatility. In ZGI’s case, a 10 per cent allocation in a North American equity portfolio also led to an increase in the portfolio’s Sharpe ratio.
We note a key differentiator between the two more “mature” ETFs is ZGI’s relatively higher allocations to midstream energy and specialized REITs. CIF, on the other hand, does not invest directly in any real estate companies and has about 30 per cent of the portfolio allocated to the industrials (that is, primarily construction and engineering companies) instead. As a result of these differences, ZGI has historically exhibited lower volatility and lower correlations with broad market indexes.
Jin Yan, Ian de Verteuil, Shaz Merwat, and Jinzhu Zhai are equity analysts for CIBC World Markets.
This is an edited version of an article that was originally published for subscribers in the May 20, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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