Data points and economists frequently tell investors that inflation, often one of the primary reasons for embracing hard or real assets, is benign. Assuming that's true and there is some debate as to the efficacy of many of the most widely followed gauges of inflation, the case for owning hard assets remains strong in the current environment.
For investors looking to embrace hard assets, the FlexShares Real Assets Allocation Index Fund (ASET) is an exchange traded fund that makes a lot of sense because the product checks a lot of boxes that are helpful when inflation rises or when interest rates are low, as is the case today.
Real assets are often defined as commodities, infrastructure investments and real estate, among others. Traditionally, the view of accessing these concepts has been myopic with many fund issuer opting to address each concept in singular fashion. For example, there plenty of funds focusing solely on energy investment. The same is true of real estate and there are more than a dozen dedicated infrastructure ETFs on the market.
ASET marries all three concepts using a fund of funds structure. More simply, the FlexShares fund holds three ETFs that are family members – the FlexShares Global Quality Real Estate Index Fund (GQRE), FlexShares Morningstar Global Upstream Natural Resources Index Fund (GUNR) and the FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA).
ASET's methodology enhances one of the primary selling points of real assets, that being low correlation. Hard assets are usually sport low correlations not only to common stocks and bonds, but to each other as well.
“Real asset returns have historically had low correlations to traditional equity and fixed income investments, which our findings suggest can provide an effective way to enhance the diversification of a traditional stock and bond portfolio,” said FlexShares in a recent research note.
Even when putting the inflation argument aside, ASET remains a compelling idea for 2020. It's presidential election year and infrastructure is a rare bipartisan issue. That said, Congress hasn't passed a major infrastructure bill of any substance in decades, something President Trump and his Democratic challenger are likely to harp on on the campaign trail.
“Once again, Americans yearning for an upgrade to the country’s outdated infrastructure will look to the presidential election in hopes of a grand plan,” reports Fortune. “While there’s wide agreement that the country’s roads, bridges, railroads and airports and other public works are long overdue for help, there’s been scant action despite a lot of big talk. The American Society of Civil Engineers has said more than $2 trillion in additional funding is needed by 2025 alone.”
When it comes to energy, one of the largest sector weights in the aforementioned GUNR, one of the ETFs held by ASET, the group is cheap relative to the broader market.
“Even with spot prices 11% above our midcycle price forecast, we continue to see investment opportunities, as energy remains the most undervalued sector, trading at a 10% discount,” according to Morningstar.
As for global real estate, the thesis there remains sound because the worst case scenario for many countries' central banks represented in NFRA is to hold rates this year while some are likely to cut. A raft hikes isn't in the forecast.
For investors looking for an idea that features income (ASET yields over 5%) with downside protection and long-term upside potential, ASET is a worthy consideration.
“For many investors, this scenario may be visualized within their own daily experience as they see leasing of vacant space, a steady climb of toll road fees, rising usage of energy or climbing wood prices,” said FlexShares. “We believe that income from real asset-related investments may help protect value on the downside, while operational efficiencies may enhance value on the upside.”
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