FlexShares, the ETF brand from Chicago-based Northern Trust, has already made waves in its short time on the market. The new ETF provider has just over a dozen funds in its offering, and it has already seen a solid level of interest in a few of its choices, including close to $2 billion in both iBoxx 3-Year Target Duration TIPS Index Fund (TDTT - ETF report) and the Morningstar Global Upstream Natural Resources Index ETF (GUNR - ETF report).
Thanks to this success, FlexShares hasn’t been shy about putting out new products on to the market. The company is now continuing this trend with a fresh focus on international markets to beef up its product lineup (see FlexShares Releases 3 New Dividend ETFs).
The latest few funds have been targeting foreign dividend markets including products focused on quality, defensive names, and a ‘dynamic’ international product as well. In continuing with this theme, FlexShares has now put out another new ETF, this time targeting foreign infrastructure companies with its STOXX Global Broad Infrastructure Index Fund (NFRA - ETF report).
This new ETF looks to charge investors 47 basis points a year in fees and will provide investors with diversified exposure to global companies that have infrastructure ownership. While there is a bit of competition in this space, this may be a potentially better way to play the sector and we have highlighted some of the key points regarding this new FlexShares fund below:
NFRA in Focus
This ETF follows the STOXX Global Broad Infrastructure index, holding companies that are in any of the following business lines; traditional utilities, energy, transportation, communications, and government outsourcing/social infrastructure. In total, the ETF holds roughly 150 names in its basket with a heavy focus on large cap firms (read Active Large Cap ETFs: Best of Both Worlds?).
In terms of sectors, energy, communication, and transportation all take up a good chunk of assets and combine to make up nearly 85% of the portfolio. The U.S. leads from a national look at nearly 40% of the total, while Japan, the UK, and Canada all receive double digit allocations as well. Top individual holdings include AT&T (T), Vodafone (VOD), and Union Pacific (UNP) although all of them account for less than 4.25% each.
How does this fit in a portfolio?
FlexShares believes that this segment is a solid pick for investors seeking a defensive play that has a low correlation to other sectors of the global economy. The sector can also be a good yield play, as many securities in the infrastructure space pay out robust yields.
The product may not be appropriate for those who are looking for high growth plays as infrastructure is generally a slow-growth business, and most of the names in NFRA are large caps anyway. Additionally, the fund does have some concentration risks in terms of sectors, while the portfolio doesn’t have a large component in emerging markets (at least directly), so investors may miss out on some of the gains there (see Emerging Market ETFs: How to Pick Winners).
Competition and Bottom Line
There are a few competitors in the infrastructure market, any of which could be foes for NFRA. Some of the most popular include the iShares S&P Global Infrastructure Index Fund (IGF - ETF report), the iShares S&P Emerging Markets Infrastructure Index Fund (EMIF - ETF report), and the PowerShares Emerging Markets Infrastructure Portfolio (PXR - ETF report).
Obviously, PXR and EMIF are going to be a lot more focused on emerging markets, and thus might not be appropriate competitors for the newly launched FlexShares fund. So the real competition will probably come from IGF and the relatively small SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII - ETF report).
Both GII and IGF have a focus on developed markets and put their biggest weight into the U.S., just like NFRA. The yields for both are roughly around the 3.7% mark in 30-Day SEC terms, so they can be considered income destinations as well (See all the Utilities/Infrastructure ETFs here).
Given the similar focus of these ETFs, and the fact that the leader has less than $600 million in assets, and it could be difficult for NFRA to build up assets. However, if it is able to show some outperformance—or beat out the others on yield—it could definitely find a niche in this competitive corner of the market.
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