For this episode of “ETF 360,” VettaFi’s head of research, Todd Rosenbluth, spoke with Scott Helfstein, executive director of thematics investing at ProShares, about infrastructure investing in an environment of rising interest rates.
The last time that the U.S. experienced significant inflation was during the late 1970s and early ’80s, and it was during this period that Warren Buffett, chair and CEO of Berkshire Hathaway, stated that the companies that would perform strongly in environments of inflation were those that were the price setters. ProShares believes that infrastructure companies are these types of companies that are driving prices in the current environment.
“These are companies that own real assets, that help to support us through energy transfer, that help to support the energy utility grid as well as communication networks,” explained Helfstein. “Those companies can increase prices over time to match the increasing commodity costs that they face.”
Looking back over the last two decades, when inflation was an average of 2.25%, infrastructure owners and operators outperformed the S&P 500 and the MSCI by approximately 100 basis points monthly. It equates to an annual differential of 10%, Helfstein said.
“Throughout the period since the Financial Crisis where investors have been searching for yield, infrastructure since 2014 has delivered yields above that of the 10-year Treasury and the S&P 500,” Helfstein explained.
Yields for infrastructure are around 4% and have been so for the last eight years.
Investing in Infrastructure Owners and Operators
In a challenging global macro environment where supply chains have been impacted by the war in Ukraine as well as China’s lockdowns related to COVID-19, there has been a real impact on gross margins for many companies. Producer price increases are at a 70-year high compared to consumers, reflecting the strong impact that inflation has on consumers and producers.
“The infrastructure companies, the owners and operators — and again, this is going back to 2014 — have had less volatility in their margins than the S&P 500, the S&P energy sector, as well as the MSCI Global Index,” Helfstein explained.
The ProShares DJ Brookfield Global Infrastructure ETF (TOLZ ) takes a unique approach in that it doesn’t focus on the early cyclical components within infrastructure, such as materials and heavy machinery but instead on the owners and operators that own the energy pipelines, transmission lines, water utilities, and communication networks.
“When we talk about spending on infrastructure, while the pick and axe group is perhaps the first ones to be rewarded, what you’re ultimately doing is adding capacity to the owners and operators so that they can provide more of these critical services into the future,” Helfstein said.
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