Components of Leveraged & Inverse Funds

Leveraged and inverse funds, also called "geared" funds, seek to return a multiple or inverse multiple (e.g., 2x, -2x) of the return of a benchmark for a single day, before fees and expenses. There are a number of ways geared funds can be constructed to achieve their objectives, including using combinations of traditional securities, like equities and cash, along with derivative products, such as futures, forwards and swaps.

There’s a Massive Global Need for Increased Infrastructure Spending

In the United States, infrastructure is aging and under strain—which is why an infrastructure bill is in play. The need is significant. Just this year, the American Society of Civil Engineers graded a range of infrastructure categories and determined many were approaching failure, requiring nearly $6 trillion to maintain a good state of repair. Traditional funding sources like municipalities are unable to meet future requirements given their fiscal challenges, so not only federal, but also private investment may be required.

The same holds true globally. In its 2019 Global Risks Report, the World Economic Forum noted that to keep pace with global population and economic growth, and to meet the UN’s Sustainable Development Goals of clean water and electricity, $97 trillion needed to be invested into global infrastructure. Based on current spending trends, there is a $18 trillion spending shortfall—a shortfall that may attract capital long after a stimulus bill and economic reopening.

Infrastructure Has Offered Compelling Yields Backed by Stable Cash Flows

In a yield-starved market, publicly traded (listed) infrastructure owners and operators have provided an attractive income stream, supported by stable cash flows. Many investors could be well served to focus on the income-generating infrastructure assets that may be strengthened by government action and a successful vaccine rollout.

Record-low interest rates have created challenges for income-seeking investors. Traditional sources of yield, like fixed income investments, can nowadays be inadequate with current 10-year Treasury rates hovering well below 2%. Investors have therefore looked to alternative sources of yield, like high dividend-yielding equities, to enhance their portfolios’ income generation capabilities.

However, risks abound. Typically, stretching for yield can lead to poor outcomes if investors focus on stocks that may not be able to sustain their dividends in times of economic hardship. When stocks cut their dividends, poor performance often follows, as was the case during 2020. In contrast, pure-play infrastructure stocks—companies whose business is primarily owning or operating infrastructure assets like toll roads, electricity-transmission networks, airports and water supply systems—have typically generated long-term cash flows, regardless of the economic environment, and may be a compelling source of yield for investors, although it should be noted that there is no guarantee of income.