First Trust Launches Infrastructure ETF with Global Reach

First Trust Advisors is the latest exchange-traded funds provider to try to reap gold from a trend of increased infrastructure spending across the globe.

The ISE Global Engineering and Construction Index Fund (AMEX: FLM), launched on Wednesday. It competes with a handful of infrastructure ETFs already trading. Those include the iShares S&P Global Infrastructure Fund (NYSEArca: IGF) and the SPDR/FTSE Macquarie Global Infrastructure 100 Fund (AMEX: GII).

Also, on Oct. 16, the PowerShares Emerging Markets Infrastructure Portfolio (PXR) is expected to start trading. (See story here.)

FLM will focus on construction and engineering firms, as opposed to the utilities weighting that has dominated ETF infrastructure portfolios.

To a lesser extent, infrastructure ETFs can be compared to the wide range of materials and basic metals ETFs that also have performance linked to infrastructure spending. Those include the iShares Global Materials (NYSE: MXI) and the Market Vectors Steel ETF (AMEX: SLX).

First Trust already offers a global infrastructure play in a closed-end fund format.

With the new infrastructure ETF launches, the releases from ETF providers often read more like World Bank or United Nations global demographic trend reports than fund literature.

First Trust's FLM is no exception.

In previewing the launch of the fund, the company notes it is estimated that by 2050, the world population will grow to 50 billion, and half the world's population will live in urban areas by the end of 2008, and 70% in cities by 2050 (United Nations).

Most importantly, $71 trillion will be needed in infrastructure spending worldwide through 2030 (Organisation for Economic Cooperation and Development).    

The long-term trends might be good, but all the hyperbole has not resulted in stellar performance for infrastructure funds.

The iShares IGF is down 36.28% in 2008 through Oct. 14, according to Morningstar data. IGF is down 18.21% in the past month, and 27.60% in the past three months. GII has had a similar recent return profile, down 32.39% in the same year-to-date period, 17.66% in the one-month period, and 26.45% in the past three months.

Index Differentials 

Even though these two largest infrastructure ETFs have similar negative performance, their underlying indexes differ in important respects. Most notably, IGF is weighted 40% to utilities, while the concentrated equity ETF GII is 87% in utilities, according to Morningstar.

The biggest difference between the existing ETFs and FLM is the complete absence of utilities exposure in FLM. It is a 100% construction and engineering play, which is a subsector of the industrials sector.

First Trust's Eric Anderson said the company is specifically launching the ETF because of this unique take on the infrastructure segment, and because its prelaunch research showed that there is no ETF in the market that captures the same universe of stocks.

But he added that construction and engineering firms have also had a rough time as the markets have tightened up, and the short-term performance profile is not dissimilar to the existing infrastructure funds.

However, the key is that infrastructure is a long-term trend, and the construction and engineering ETF is a first of its kind in the market by tackling infrastructure investing through a universe of growth stocks. The utilities-heavy approach in existing infrastructure ETFs creates more of a value stock-based, dividend-producing fund.

In terms of expenses, IGF has an expense ratio of 0.48%, while GII has an expense ratio of 0.59%. FLM comes in at the higher 0.70% expense ratio, Anderson said, due to its global investing approach.

FLM uses the International Securities Exchange's Global Engineering and Construction Index as its benchmark. The relationship extends First Trust's previous use of ISE indexes for the creation of ETFs, marking the fifth ISE index-pegged First Trust ETF. The company already has ETFs based on ISE water, wind energy, China and natural gas indexes.

The First Trust launch will also slightly mitigate the slip for ISE in overall ETF licensing agreements versus its exchange peers, after FocusShares announced last week that it would be shuttering all four of its ISE index-pegged ETFs (see story here).

-- This report was submitted by Eric Rosenbaum.

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