Infrastructure ETFs for Home and Around the World

By Nihar Patel - October 19, 2012 | Tickers: EMIF | 0 Comments

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I have talked about how important infrastructure is before, and how the United States is in dire need of an overhaul. I think the US floodgates for infrastructure spending are at most 3 years away from blowing open completely, unless a methodical infrastructure upgrade plan is rolled out. Either the money is spent efficiently over time, or it is hastily thrown at inefficient projects due to pressing need. Limiting yourself in the long-term to the United States is not the best decision though. I do not just mean emerging economies, but other developed economies as well.

In doing my research for this article, I narrowed it down to two different kinds of ETFs that will give you the broadest exposure. One focuses on the developed world and the other on the developing world. The developing world is probably the safer infrastructure investment, and I will discuss why later. But first let's talk about why I believe the developed world will need to spend heavily.

The Developed World has Delayed Too Much

SPDR FTSE/Macquarie Global Infra 100 (NYSEMKT: GII) is my developed economy ETF of choice. This ETF focuses primarily on the US and Europe. This is a good place to get United States exposure rather than trying to find specific stocks like those mentioned in my last infrastructure article. You should look at the breakdown of the holdings. I like that the weight is heavily on the United States; almost 50% of the ETF is US-based, though I suspect some of those are just listed on US exchanges but still foreign companies.

The reason I like the US focus is because I think the infrastructure bill that the President wants to pass will eventually be approved by Congress. And even if we get a new president in November, I expect substantially the same bill to be passed. It may not be what America needs fiscally, but looking at jobs numbers and seeing the condition of our roads, electrical grid, and water distribution system, it cannot be denied that the bill would be good for the country.

On a longer timescale, after Europe rights itself infrastructure spending will increase there too. This is the course I see for the developed world for the next 5 to 10 years. Political brinksmanship and empty treasuries might mean the infrastructure boom is a ways off, but it should arrive eventually. It might come down to a big catastrophe like one of America's structurally deficient bridges collapsing. Hopefully, the government thinks long-term, but if they think short-term the future will eventually kick them in the shin. Hopefully it won't look like that recent Final Destination movie.

One final thing I like about the ETF is that only 1/3 of its assets are in the top 10 holdings. It picks its favorites, but still has 2/3 devoted to other companies. I think it is good to be as broad as possible. One of the few things I learned getting my political science degree is that states and municipalities play favorites. If the company is stationed locally, and uses local workers and suppliers it is likely to get some favorable treatment. To benefit from increased government spending, geographic breadth is needed even within the nation.

The Emerging Economies Need to Build as their People Prosper

As emerging economies bring their people prosperity, those same people will expect their government to provide basic services. Emerging economies that are export-driven tend to have lots of cash to spend on big public works projects. More than that, they lack the fixed expenses in their budgets that eat at discretionary funds. Not to pick a side on the debate, but look at an informal breakdown of mandatory spending for the United States; the federal government basically has no control over 60% of the yearly budget. For better or worse, emerging economies lack these obligations, which allows them big public works projects that the United States simply cannot match.

My ETF of choice for emerging economies is iShares S&P Emerging Mkts Infrastructure (NASDAQ: EMIF). Regional exposure is about split evenly between Latin America and Asia, which are the two regions I and many others like best. Africa will have its day, but it's not yet. Asia is a well-known rising star, and Latin America has been in Asia's shadow for too long. There are many positive signs in Latin America, like the oil boom in Brazil or the growing popularity of Chilean wine (that second one is only half facetious).

There is a reason I do not like country-specific ETFs for infrastructure spending. Infrastructure spending is uneven, and is prone to more graft than other industries. Whenever large government expenditures are involved in developing countries the specter of corruption looms large. The solution is, as always, diversity. This ETF does not do that perfectly, though I still think it is the way to go for an emerging economy infrastructure ETF.

Two countries make up 50% of the weight of the index. They are Brazil and China, with Brazil being slightly heavier. I do like that Brazil tops the list, because I think China is over-hyped and overextended. The top 10 holdings account for almost 68% of the assets, and only 38 total holdings. I may not get as much diversity as I want with EMIF, but its got a respectable year-to-date return of 15.19%.

Conclusion

Keep in mind the risks of these infrastructure ETFs. A lack of resolve to make needed upgrades in the developed world might push back any benefit, and there could be a small chance that spending is such a trickle that the job gets done without providing adequate financial gain to the companies, basically just keeping them on life support. There is substantial political and macroeconomic risk for both ETFs, but I think it is much greater for the developed economy ETF. Still, at least these ETFs are safer than trying to pick specific infrastructure stocks that will benefit.

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