Infrastructure Fund: Definition and Examples

We build our everyday lives over infrastructure. It includes water and sewer services, utilities, shipping and waste management. An infrastructure fund invests in companies providing these systems. Such funds can decrease volatility in a portfolio. Here’s what to know about those funds before you invest. For advice on whether these funds should be part of your portfolio, consider talking to a financial advisor.

What is an Infrastructure Fund?

Infrastructure funds invest in public assets and services that people rely on to live, work and travel. These funds can be invested in things like:

Electric and other utility services.
Water and sewage services.
Waste management companies.
Rail travel companies.
Shipping and freight services.
Engineering and construction.
Oil and gas pipelines.
Airports.
Law enforcement and emergency services.
Education services.
Agriculture and farming.
Communications services, including cell phone towers.

An infrastructure fund may not seem quite as glamorous as a fund investing in something like biotech. However, infrastructure funds focus on services and systems required for living. As a result, they can provide investors with stable and consistent returns.

Characteristics of an Infrastructure Fund

Infrastructure mutual funds are appealing for their potential to generate steady income and offer a hedge against inflation, making them a popular choice among investors seeking long-term growth and portfolio diversification.

Focus on Tangible Assets: Infrastructure mutual funds primarily invest in physical assets such as roads, bridges, power plants, and other utilities. This focus provides a degree of security since these are essential services often backed by government support or public contracts.

Income Stability: These funds are known for providing relatively stable income streams, as infrastructure projects often generate consistent revenue through tolls, tariffs, or user fees. For investors, this stability can be especially attractive during market volatility.

Long Investment Horizon: Infrastructure projects often require significant time to yield returns, meaning these funds are best suited for investors with a long-term perspective. Investors should be prepared for a holding period that aligns with the lifecycle of large projects.

Inflation Hedge Potential: Infrastructure assets can serve as a hedge against inflation, as many of these investments have returns that increase with inflation. Utilities, for instance, often have contracts that adjust rates with inflation, helping preserve purchasing power.

Government and Regulatory Influence: Many infrastructure projects involve regulatory and government oversight, which can impact fund performance. Investments in public infrastructure are often tied to political agendas, regulatory changes, and government funding, all of which can influence returns.

Diversification Benefits: Including infrastructure mutual funds in a portfolio can enhance diversification. Since these assets often do not correlate strongly with traditional equity and bond markets, they can help reduce overall portfolio risk.

Exposure to Emerging Markets: Many infrastructure mutual funds have exposure to emerging markets, where the need for new infrastructure is high. This exposure can offer higher growth potential but may also introduce risks related to political and economic stability.

Environmental, Social, and Governance (ESG) Considerations: Increasingly, infrastructure mutual funds are evaluated based on ESG metrics, as sustainable infrastructure becomes a priority. Investors may find options aligned with their environmental or social responsibility goals.

It’s important for investors to carefully consider the long-term nature of these funds, potential regulatory impacts, and specific risk factors associated with these funds.

Advantages of an Infrastructure Fund

There are several reasons to like infrastructure funds as an investment tool. In terms of performance, these funds can offer stable returns over time. For instance, demand for infrastructure services and products tends to remain constant even during slower economic periods.

According to Morningstar, infrastructure funds as a whole generated an 8.41% 10-year average annual return through the fourth quarter of 2018. Though not as strong a performer as the technology or consumer discretionary sectors, infrastructure can still deliver respectable returns over time. In a down market cycle or recession, investing in infrastructure funds can be defensive. In other words, they tend to be less volatile than other market sectors.

Since roads, bridges and rail lines are tangible, they can generate cash flow over the long term if properly maintained. That cash flow can resist inflation and rising prices, due to the design of infrastructure contracts. For example, a shipping company that contracts with the government may have a clause built in that allows them to adjust rates when inflation rises.

Infrastructure funds also allow you to diversify beyond the typical mix of investments you might already own. While stock market movement can affect infrastructure somewhat, infrastructure funds potentially offer more insulation against volatility when stock prices fluctuate. As a result, you can better manage risk in your portfolio.

These funds also benefit from lower rates of competition among service providers. In some instances, infrastructure providers may hold a monopoly over a certain geographic area or service. Or a government entity may grant a limited number of providers contracts to provide certain services. The high cost of development can also be a barrier to entry from smaller or newer. Consequently, all of the above offers a layer of protection to established infrastructure companies.

Infrastructure Fund Disadvantages

In investing, risk and reward tend to have a direct correlation. The riskier an investment is, the more rewarding it may be to investors. Infrastructure funds are less risky by nature than funds that invest in growth stocks or tech, for example. While they can generate better yields than bonds or fixed-income instruments, infrastructure funds as a whole tend to lag behind S&P 500 returns.

Now, whether that’s an issue for you depends largely on your goals and objectives for investing in infrastructure funds. If you’re more interested in income from dividends than capital appreciation, for instance, then an infrastructure fund could be a good choice. For example, a typical dividend-paying fund tends to be in the 2% to 5% payout range, while infrastructure funds can often beat that.

Dividends can be a good source of supplemental income in a retirement portfolio. On the other hand, if you’re looking to make some quick gains then infrastructure funds may not be as suited to the task as another type of fund.

How to Invest in an Infrastructure Fund

You can invest in an infrastructure fund by purchasing shares through a taxable online brokerage account. You can also check your IRA or 401(k) fund options to see if infrastructure funds or ETFs are included.

As you compare funds, remember to look at the fund costs, including the expense ratio. Check how well a particular fund has performed historically and what it invests in, noting whether a fund is diversified or non-diversified.

Once you find a fund or two you’re interested in, compare that to the funds you already own to make sure there’s no overlap. It’s possible that you could have similar exposure to infrastructure companies if you already own some utility funds or ETFs, for example. You don’t want to become overweight in any one sector, as that could throw off your asset balance and increase your risk profile.

Bottom Line

An infrastructure funds represents the systems, products and services that are needed to keep the economy humming along. These funds can add stability to a portfolio, though they may not be appropriate for every investor. Taking into account cost, risk and performance is essential for choosing the right infrastructure funds to invest in.

Investment Tips

Consider talking to your financial advisor to learn more about infrastructure funds and how they can benefit your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Consider an infrastructure fund’s dividend yield but don’t focus on it exclusively, as this number change over time and isn’t always guaranteed to increase. Dividend yield is just one part of the puzzle you can use to determine whether a particular fund is worth your time and money.