Infrastructure's Future: ETFs Worth Allocating To

In this weekend's video I did a brief recap of my time with the Macquarie Infrastructure Trust (MIC) and what has happened with a couple of their CEFs in this bear market.

A reader asked how should the infrastructure theme be accessed given how badly the Macquarie products have done. The reader presumes that the theme is worth allocating to, and I agree.

There are several ETFs but they each target different areas within the space. The SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII) is 90% utilities and so tracks closely with that sector. The PowerShares Emerging Markets Infrastructure Portfolio (PXR) is 40% materials and perhaps confusingly has non emerging market stocks in it (a company that sells to emerging market countries can be included). The iShares S&P Global Infrastructure Index ETF (IGF) is mostly an even mix of industrials and utilities with a little pipeline thrown in. Included in IGF are some of the cash flow segments like toll roads and airports. I use IGF in some portfolios.

IGF is down a lot, but less in the trailing twelve months than the Industrial Sector SPDR (XLI).

One way to buy in, but not what I am doing or will do in the future, would be to use GII as a proxy for utilities, PXR for materials and IGF for industrials (IGF has tracked much closer to industrials than utilities). All three funds track their corresponding sectors closely enough that I think they are suitable sector proxies with the hope of outperforming whenever the theme starts to matter.

I think of this as something to unfold over most of a decade, like emerging markets were in the oughts (or, if you prefer, the noughties). In looking ahead like that, I believe that the theme will be best captured by including individual stocks into whatever you do. IGF and PXR include a lot of stocks that will build the roads or provide the technology needed for any sort of project, but they aren't that heavy in the cashflows that the engineers and systems company will be creating. Actually IGF has about 25% in these stocks. For now, building the stuff is probably more important than the cashflow from the finished product, but that will not always be the case.

Comments

[intrigued i...:]

I heard that First Trust has an infrastructure (FLM) ETF - how does that size up to the ETFs mentioned in your article?

Mar 23 04:41 PM

[donzelion:]

"...I believe that the theme will be best captured by including individual stocks into whatever you do."

I like the theme, but have a great deal of trouble understanding the investment case for municipal bonds in an era of high monetary volatility. Whether deflation or inflation hits, munis are a tough sell - in inflation, the tax and other advantages are eroded, and in deflation, the asset class may be less optimal than other choices once you include opportunity costs.

Worse, investment in infrastructure is generally tied to anticipated industrial/agricultural needs: if we have industrial overcapacity (as many argue, though the jury's still out), we would probably also have infrastructure overcapacity (at least, in certain regions - arbitrariness of local politics are too important to infrastructure matters to be overlooked).

Mar 23 05:44 PM

[Roger Nusbaum:]

Forgot about FLM. A quick glance under the hood it is heavy heavy in industrials, more so than IGF and done about the same as IGF. In looking at the holdings on the FT websites it appears to not own any of the cashflow names (toll roads and ports) which I suspect would make it more volatile than IGF. At times that will be a good thing and at other times a bad thing I suppose.


On Mar 23 04:41 PM intrigued investor wrote:

> I heard that First Trust has an infrastructure (seekingalpha.com/symbo...)
> ETF - how does that size up to the ETFs mentioned in your article?

Mar 23 08:24 PM

[Conan the B...:]

Where can I find the composition of the ETFs mentioned? I would imagine that some would definitely outshine others.

Also, any ultras in this sector? That might obviate the need to look at individual stocks.

IMO

Mar 24 08:28 AM

[Roger Nusbaum:]

the best place to look is the website of the fund provider. no levered infra ETFs that I am aware of.

Mar 24 02:11 PM

[MaineLobster:]

Interesting. But I think it would be responsible if you mentioned that ETF's are not but and hold vehicles. They were invented for day trading and should be used that way.

Mar 24 03:42 PM

[Marnie:]

Why do you think ETF's are not suitable for buy-and-hold, MaineLobster? I would certainly use them in strategic asset allocation.

Mar 24 05:32 PM

[Roger Nusbaum:]

yeahwhatnow?


On Mar 24 03:42 PM MaineLobster wrote:

> Interesting. But I think it would be responsible if you mentioned
> that ETF's are not but and hold vehicles. They were invented for
> day trading and should be used that way.
>

Mar 24 09:07 PM