Should You Invest in Infrastructure?

According to the National Oceanic and Atmospheric Administration, 2017 was the costliest year on record for natural disasters in the United States. Wildfires in the western states, combined with Hurricanes Harvey, Irma and Maria and other severe weather incidents, led to $309 billion in damage. And 2018 has already seen severe weather, including numerous floods, tornadoes and wildfires and the ongoing volcanic eruption on the island of Hawaii. These events, along with other recent disasters and an ever-growing backlog of deferred maintenance, underline the need for infrastructure upgrades in the United States, which may provide opportunities for real estate investors. 

Create a reliable income stream

Many developed countries — such as the United States and Great Britain — and developing countries will need to extend or revamp their infrastructures in the near future. And, with many governments still strapped for cash, the door is wide open for private investors to get involved in financing infrastructure construction and repair.

Whether it’s for bridges and dams, railways and roads, waste disposal, telecommunications, power stations, pipelines, or ports, these projects need financial backing. Infrastructure funds can help investors do just that.

Infrastructure funds may offer a safer, more dependable income stream than other types of investment options. Many infrastructure assets have a virtual monopoly on the markets. And the large monetary investment required to develop most infrastructure assets makes it unlikely that competing assets will be built.

Unfortunately, the distinct opportunities presented by infrastructure investing come with unique challenges. Industry growth and consolidation, new investment products,  government intervention and regulatory changes could affect infrastructure investors in years to come. Asset-specific risks relating to the design, construction and operation of infrastructure assets pose additional challenges.

Consider ETFs

Because of the related risk and high capital requirements for infrastructure projects, investors may want to consider accessing this unique asset class through index-based securities such as exchange traded funds (ETFs). These funds trade like stocks on an exchange and offer diversity similar to that of mutual funds.

But unlike mutual funds — which try to outperform the market — ETFs sync with a major market index and investors can trade them intraday or in after-market sessions. Because they’re passively managed, ETFs also offer lower administrative expenses and fees than do mutual funds.

Infrastructure ETFs mimic the performance of certain indexes, such as the S&P Global Infrastructure Index and the Macquarie Global Infrastructure 100 Index. These indexes are designed to help investors track infrastructure companies, monitor fund performance and simplify investment in ETFs.

With their many attributes, infrastructure ETFs may warrant attention from investors interested in defensive, high-yield securities. Infrastructure investing isn’t without risk, however. Rates of return vary significantly from project to project, and, even though infrastructure is somewhat insulated, it isn’t immune to the ebb and flow of economic tides.

Proceed cautiously

Having completed tax reform, the Trump administration has stated it’s looking to tackle infrastructure sometime after the midterm election in November of this year. While infrastructure ETFs aren’t new, it’s important that you conduct thorough due diligence if you decide they’re right for your real estate business. Be sure to consult with your financial advisor and legal counsel to have a comprehensive understanding of the risks and rewards.

© 2018