Market Overview

An Intelligent Infrastructure ETF

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An Intelligent Infrastructure ETF

The 2016 U.S. presidential campaign renewed investors' enthusiasm for infrastructure investments, including exchange-traded funds, as both candidates promised massive spending aimed at shoring up America's failing bridges, roads, railways and other infrastructure needs.

On the campaign trail, President Trump promised to spend $1 trillion to bolster U.S. infrastructure. Although the Trump administration's infrastructure endeavors have not started in earnest, some ETFs levered to this theme are benefiting. After hitting another record high last Friday, the FlexShares STOXX Global Broad Infrastructure Index Fund (NYSE: NFRA) is higher by almost 12 percent year to date.

NFRA, which is nearly four years old, tracks the STOXX Global Broad Infrastructure Index. True to its name, NFRA is a global ETF featuring exposure to 10 countries. However, U.S. equities account for over 40 percent of the fund's weight.

Primed For More Upside

NFRA and rival ETFs have been boosted by investors' expectations that infrastructure spending is slated to rise. While there are no guarantees that scenario will come to fruition, it is logical to expect global infrastructure spending will increase in the coming years.

“Infrastructure investment was lower in 34 states last year than it was in 2007. The federal government is also struggling to keep the Highway Trust Fund full with the current 18.4-cents-per-gallon national gas tax. Raising the tax to 31 cents per gallon is necessary to make a dent in surface transportation work,” according to Construction Dive.

At issue for NFRA is how much leverage the ETF provides to the infrastructure spending theme. The ETF allocates over 60 percent of its combined weight to the energy and telecom sectors, the two worst-performing groups in the S&P 500 this year, making the ETF's year-to-date performance all the more impressive.

Interesting Holdings

NFRA's top 10 holdings, which combine for about 30 percent of the ETF's weight, include some names that investors do not always associate with infrastructure spending. For example, NFRA's top two holdings are AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ).

NFRA is primarily a large-cap value fund, but a third of its 158 holdings are classified as growth stocks. Other countries represented in the ETF include Canada, Japan and the U.K. China, NFRA's smallest geographic weight, is the only emerging market found in the fund.

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