I have been focusing on the Health Care (XLV), Real Estate (XLRE), and Utilities sectors (XLU) for a number of reasons recently, including, but not limited to, their real asset appeal. Real assets are things like natural resources, real estate, and infrastructure, tangible items. Their appeal lies in their steady revenue streams, inflation-adjusted earnings, above-average dividends and superior risk-adjusted performance in times of market turbulence.
Because we are in a time of market turbulence (trade war, FOMC outlook, slowing growth - need I say more), I thought it would be interesting to see how some of the popular infrastructure investment vehicles have been performing. I'm glad I did - infrastructure-focused real assets investments are outperforming the broad market. The caveat is that not all assets are seeing the same strength.
What I've done is compare some of the popular infrastructure-related investment vehicles with the performance of the broad market S&P 500. I've included corporations in business for infrastructure investment/operation, ETFs and sector ETFs with a variety of infrastructure investment approaches, and some infrastructure-themed closed-end funds with the same intent in order to include a wide, diversified array of investment vehicles for the comparison.
Within the corporations, ETFs and CEFs on my list, you will find exposure to energy and energy infrastructure, MLPs, real estate, utilities, infrastructure equities, equity funds, fixed-income funds and multi-asset funds with global and U.S. focus.
In the comparison, I checked for five simple things: yield, the year-to-date change, the % change relative to August's broad market selloff, the % change relative to the August broad market rebound and the % change from the July market peak to the present. What I found is that every infrastructure real asset I checked outperformed the broad market in some way. The catch is that some outperformed by an inch, others by a mile.
S&P 500/Infrastructure Comparison - The Dividends
The first metric, and one of the most important I think, is the dividend yield. Performance is relative to yield - a small drop in a big payer is more tolerable than a big drop in a small payer, and that is the situation we have now. The S&P 500 pays a measly 1.85% and shed more than -7% during the last sell-off, while the average yield of stocks on my list is over 6% with an average sell-off decline of just over -3.0%.
When it comes to dividends, the real assets and infrastructure sectors are very good. The lowest yield in the group is that of the Utilities SPDR ETF at 3.04%, and even that is well above the S&P 500 average. If you dig down into the Utility sector, you can find better. The highest yield is an alarmingly high 16% with the Center Coast MLP & Infrastructure Fund (CEN). I say alarmingly because the highest yields in a group are often the most unstable - not saying this one is, just that it raises a red flag for me.
Some of the more interesting names on my list are paying in the range of 4.5-6.5%. The closed-end funds are of particular interest from a dividend standpoint. Most of them pay more than 6%, with the Brookfield Real Asset Income Fund (RA) yielding over 10%. In this comparison, the Infrastructure group wins hands down.
S&P 500/Infrastructure Comparison - Year-To-Date Gains
The S&P 500 has had a great year regardless of the July market top and August downdraft. The broad market index is up 17% after regaining all of 2018's losses and more. In that time, the average infrastructure investment on my list has risen 19.20%. This is not a massive difference, but enough when you add in the impact of dividends. Plus, when you dig deeper, you can find even better YTD capital gains with individual assets.
The ones the stand out are Brookfield Infrastructure Partners (BIP), Hannon Armstrong Sustainable Infrastructure Capital (HASI), the Real Estate Select Sector SPDR ETF (XLRE), Cohen & Steers Infrastructure Fund (UTF) and the Brookfield Global Listed Infrastructure Income Fund (INF). These stocks are all up more than 20%, most in the range of 30%, and many double the broad market.
So, in this comparison, I think the winner is obvious again. Infrastructure is clearly outperforming the broad market in terms of capital appreciation, and it pays a much better dividend.
S&P 500/Infrastructure Comparison - The Sell-Off
For this comparison, I limited the asset performance to the period between July 26 and August 5, from the time the S&P 500 hit its most recent all-time high to its most recent low. The broad market fell more than -7.20%, while the average infrastructure investment on my list fell only -2.92%. Two assets fell nearly as hard as the broad market - Macquarie Infrastructure Corp. (MIC) and the Global X MLP & Energy Infrastructure ETF (MLPX) - but I chalk that up to oil exposure.
For the most part, the infrastructure assets fell -2.0% to -3.0%, but there were a few that moved higher while the broad market moved lower. Those names include the XLRE and the KKR Income Opportunities Fund (KIO). Regardless, all infrastructure outperformed the broad market during the August sell-off, and most by a fair margin. I'd say the infrastructure investments won this comparison as well.
S&P 500/Infrastructure Comparison - The Rebound
I used the same methodology for this comparison as I did the previous time. All performance figures are relative to the S&P 500 index rebound that occurred from August 5 to the present. In that time, the SPX has regained 3.70%, compared to an average 0.74% for the infrastructure investments on my list. At first glance, it looks like the S&P 500 is outperforming during the rebound. When you consider the S&P 500 fell harder and pays a lower yield, 3.7% isn't such a big deal. I'll call this one a draw.
Even so, there are still a couple of names that stand out. The Utilities and Real Estate SPDR ETFs have both rebounded an amount near equal to the broad market, while INF is up 4.35% since the market hit bottom on August 8th.
S&P 500/Infrastructure Comparison - %Change From The Market Peak To The Present
This is one of the more telling comparisons. In this one, the broad market S&P 500 is still down -3.25% from the recent all-time high while the infrastructure group only -2.18%. What is most telling is that some, a total of five, of these assets have moved on to set new highs since the market peak in July. Once again, the infrastructure real-assets are outperforming the broad market.
Global Infrastructure Equities Outperform The Outperformers
One thing that has become clear, along with infrastructures outperformance of the broad market, is that infrastructure equities ex-energy are outperforming infrastructure in general.
Looking at the three infrastructure equity companies on my list two of the three are among the five to outperform the broad market year-to-date. Those same two, Brookfield Infrastructure Partners and Hannon Armstrong Sustainable Infrastructure Partners, also outperformed during the July sell-off and August rebound.
Looking at the ETFs the Utilities SPDR ETF and iShares Global Infrastructure ETF are both performing in line with the broad market YTD, but outperformed during the sell-off and rebound. The Real Estate SPDR ETF is outperforming on a YTD basis and during the sell-off and rebound. The only downside is that the ETFs pay the lowest yields, while the upshot is a search of the REITs and Utility company will yield much higher returns.
Looking to the CEFs, the Cohen & Steers Infrastructure Fund and the Brookfield Global Listed Infrastructure Income Fund are both outperforming YTD. Both outperformed during the sell-off and moved up to set new highs in the wake of said market sell-off. These funds also pay among the highest yields.
The top-performing infrastructure asset on this list is the Brookfield Global Listed Infrastructure Income Fund, and I am not surprised. Brookfield is a leader in infrastructure investment and prominent on this list. The INF is a global-focused CEF, but more than half of the holdings are in the U.S. and another near 40% are in Canada, the EU and the UK. Although global, this is not what I would call an emerging market fund. Exposure to Asia is limited to 5.4% at this time, which I find reassuring. The only downside I see is exposure to energy infrastructure, but that is limited to pipelines, midstream and utilities.
The Bottom Line
Infrastructure investments have been outperforming the market all year. Not just that, the infrastructure investment vehicles outperformed during the recent market sell-off, and many are already moving up to new highs. The group pays market-beating dividends to boot - the only thing is not all are showing the same strength. Based on this analysis, it looks like infrastructure equities are the way to go if you are looking for returns and safety in today's market. And it looks like the Brookfield Global Listed Infrastructure Income Fund is the best way to do it.
With explosive earnings growth becoming ever elusive in today's market I expect dividend growth stocks will outperform the broad market over the next few years.
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Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.