Infrastructure vs. Utility ETFs: Don't Be a Victim of Semantics

These days, the nebulous concept of "infrastructure" is being highly touted by investment advisers. Indeed, it received special recognition throughout the Obama campaign. And big names like El-Arian have proffered infrastructure as an asset class unto itself.

That part is fine... I can accept a supposed new asset class. Philosophically separating out infrastructure doesn't really bug me, even though I see assets falling into 1 of 3 categories (i.e., share ownership, debt, hybrid).

What does bother me is the fact that infrastructure investing in the ETF world isn't uniquely distinct in price movement from tried-and-true utility ETFs. And yet, many who read that they should invest in the sparkling new asset class are falling victim to "word play."

The most prolific ETF providers, State Street and Barclay's, have each provided their respective versions of what it means to invest in "infrastructure." The iShares Global Infrastructure Index Fund (IGF) tracks 75 companies around the globe. (Of course, the index tracks the price movement of "stock ownership," so it's hard to view this investment as covering a separate asset class.)

Each company tracked by IGF engages in some form of utilities, energy or transportation infrastructure. These are companies that create roads, airports, sewage treatment plants, potable water and power grids. Not surprisingly, 40% of the companies are utilities.

Theoretically, then, the iShares Global Infrastructure Index Fund (IGF) should have a heavy utilities slant, but energy and transportation companies should make the investment "special." Moreover, the international focus should further differentiate IGF from the pure sector choice, iShares Dow Jones Utilities Fund (IDU).

I suppose one can argue that, after just 11 months, Utilities (IDU) is 1250 basis points away from Infrastructure (IGF). Therefore, the investments are sufficiently "different."

However, I see investments moving in perfect lock-step until the oil bubble burst in the summertime; that is, these investments are both stock-based investments... not distinct asset classes. Moreover, the correlation (directionality) is so high, it's difficult to see where one is getting any form of diversification. (Not across asset classes, and not across different economic segments.)

What about State Street's Macquarie Global Infrastructure 100 Fund (GII)? How different is it from State Street's Select SDPR Utilities Fund (XLU)? Here's a 2-year chart... and you tell me!

My point here is relatively straight-forward. As far as infrastructure in the stock market goes, SPDR Utilities (XLU) or Dow Jones Utilities (IDU) gives you what you need. It also gives you a 4% dividend right now.

If you're looking for infrastructure via other asset classes, you'd probably do best to buy the debt or preferred shares of utilities like Constellation Energy. The company that Buffett bought currently offers a preferred share CEG-A with a yield-to-call that is in the neighborhood of 12%.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[DavidtheGrim:]

Utilities and Infrastructure are not that different towards eachother, basically utilities should be more weighted in commodity stocks, ie: water, gas, electricity including sewage, telephone services & other non comodities that provide a consumable for consumption, rather than infastructure which should be weighted in the physical network of systems which enable the consumables to be deployed through a physical network, ie: highways, river/canal systems, railways, tunnels, processing plants, generating plants and suchlike, however it is hard to differenciate between the two as particular stocks hold both, utilities and infastructure networks are commonly contained within one stock.

Therefore there should and will be a tight correlation for the two topics regarding share price when demand for both utilities and infastructure are being satisfied or not, unless supply fails to meet demand of utilities whilst the infastructure network is in place (during peak) and visa versa (in downturns).

That would be in an ideal world, however whilst utilities may be of plenty the infastructure to support it's movement may require updating, replacing or a new network installation may be required which inturn creates movement within the shareprice for the succesful tender of the construction firm leaving the utility consumable behind in movement until the service is actually deployed to its consumer.

I am a fan of both utilities and infastructure as areas within the western world have been little developed since the last one hundred years or so, especially within the UK.

In times of downturn it is important for countries to examine their own utilities and networks of infastructure and improve where possible in order to succeed the next bull, I expect that spending will commence within the coming years to improve and update the exhausted networks already laid out, it has to be done for its economic future.

Regarding the current share valuations of funds for both is merely that which is replicated at present throughout all sectors within the market creating a vortex for pulling of stocks including proven safeheavens.

DTG

2008 Dec 03 04:33 PM

[TomLydon:]

The infrastructure sector has gotten killed this year, but it's going to be interesting to see what Obama's plan could do for the sector. Meanwhile, I think investors would definitely be wise to look under the hood and know what they're investing in.

2008 Dec 05 01:39 PM

[DavidtheGrim:]

Money Morning reported today that Obama plans to spend approx $700bn on reinforcing the USA's infastructure network, which could grow further to $1 TRILLION (via UK, The Telegraph).

Probably Obama has been sneaky peaking at my write ups??? (see first comment above in replies).

Anyways enough said there..... It will happen globally!

DTG

2008 Dec 09 03:46 PM