New Infrastructure ETF From SSGA: A Closer Look

Includes: GII, MFD, MGU, MIC
by: Richard Kang

Bloomberg News has the scoop on an ETF for a new asset class. Well, 'new' except for the hundreds, if not thousands, of large institutional investors who have already implemented exposure to the infrastructure sector.

Details of the fund
The article states that the fund will track the Macquarie Global Infrastructure 100 Index. It also specifically mentions the following sub-sectors:

• Telecommunications companies
• Electricity companies
• Water companies
• Gas-distribution companies

For anyone outside of Australia, the name Macquarie is synonymous with nothing but infrastructure investing. A Google search on this index leads you to this FTSE website that covers the Macquarie Global Infrastructure Index Series which according to the site is composed of:

• Macquarie Global Infrastructure Index
• Macquarie Global Infrastructure 100 Index
• Macquarie Global Infrastructure Hedged Index
• Regional infrastructure indices: Australasia, Japan, North America, Europe and Asia Pacific/Japan/Australia/New Zealand
• Sector indices: global oil & gas pipelines, global transportation services, global telecommunications equipment and global utilities with subsectors of global electricity, multi-utilities, gas distribution and water.

A lucky break: If you check out the “Constituents” subpage, it actually provides details for only one index which happens to be the one in question, the Macquarie Global Infrastructure 100 Index.

We find that nearly half of the positions are from the US with the internationals consisting primarily of EAFE plus Canada. For those looking for some BRIC exposure, I only see three Brazilian positions. The Bloomberg article refers specifically to “companies in countries including the U.S., Australia, U.K., India, Brazil and Russia”.

However, contradictory to the article, I see nothing in terms of direct exposure to India or Russia on the constituent listing. Nothing in China. Likely, the Bloomberg article implies that many of the companies in the index have significant exposure to these countries, but it could also be an oversight.

Infrastructure – New hot sector?
Another hot sector justifying the pumping out of a new ETF? Not so in this case. Let’s look at a few existing closed end funds in the sector -- I’ve limited them to those also from Macquarie:

Macquarie Infrastructure Company (NYSE:MIC)
MIC chart

Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund (NYSE:MFD)
MFD chart

Macquarie Global Infrastructure Total Return Fund (MGU)
MGU chart

OK, I lied. These funds are near their highs. Don’t pretend like you’re shocked. I, like many others, have been talking about this type of occurrence for a while. However, in reality, I don’t see this as a “hot” sector that is out of line in terms of overvaluation. Certainly, we’re not anywhere close to a mania in this area.

It’s true, large and sophisticated institutional investors (mega-pensions with over $100 billion in assets) are buying ports, toll highways and other large scale infrastructure projects, but I believe there is much more in the pipeline available for all other investors as various global economies are modernizing to something more similar to what we have.

Global exposure and the search for yield
Take the most often cited story of this decade: India and China. India’s “golden quadrilateral” super-highway and its associated network of roadways are in their early stages. If India is to be the US of the future, then what is to stop India from having a highway system similar to that of the US? Break out your atlas or give your globe a spin and you’ll see that, geographically speaking, India is about a third the size of the US. It’s not small and there is a large (understatement here) group of middle class workers who will want to experience the freedom of driving.

What about China? Like South Korea in 1988, there will be an explosion of tourists who will come after the Olympic games to explore China. China is already working on expanding its airports and highways for the expected traffic. They’re going to need it and more… aside from Beijing and Shanghai, most of China looks more like a truly developing country rather than a major cosmopolitan center. Although the prospects for an ambitious highway complex as in India may not be developed soon, there are so many other areas of infrastructure where China will need significant amounts of investment.

In terms of recent product development, State Street Global Advisors is on a bit of a roll with this ETF and their recent SPDR® MSCI ACWI (All Country World Index) ex-US ETF (NYSEARCA:CWI). Kudos to them on bringing a key and missing alternative asset class on line.

To some observers, infrastructure is an industry class just like technology or financials. I think that the institutions see infrastructure as an asset class because it is different in that it’s a bit like private equity in many cases, but more importantly it provides one thing that they, especially pension funds need: flow. Flow, meaning cars on a toll highway, planes passing through an airport, oil flowing through a pipe, data traveling through fibre optic cables. To them, this flow equals income.

If you go to the above charts online via, you will be given some statistics along with the charts. For example, from the chart for MGU, we can calculate the 12-month price return as just over 30%. However, this does not include the 12.5% yield (according to, paid through quarterly distributions.

Infrastructure is an area that interests me so I get updates directly from Macquarie. A December 6, 2006 press release mentioned the following:

NEW YORK, December 6, 2006 – Macquarie Global Infrastructure Total Return Fund Inc. (NYSE: MGU) (the “Fund”) yesterday declared its regular quarterly distribution for the period ending December 31, 2006 of $0.40 per share.

Based on the Fund’s net asset value of $29.37 and New York Stock Exchange closing price of $27.37 on December 5, 2006, the $0.40 per share distribution is equal to an annualized distribution rate of 5.45% at NAV and 5.85% at market price respectively.

The $0.40 per share quarterly distribution reflects a distribution policy of the Fund intended to provide shareholders with a relatively stable cash flow. This policy may be changed or discontinued without notice to investors.

In addition, the Fund declared a special annual distribution of $0.50 per share relating to additional short term capital gains earned on the sale of portfolio securities during the year.

This is just one example, but in the search for yield, infrastructure delivers. In this environment, this is not only true for the mega institutions, but for all investors. A significant global economic slowdown could put a dent into many sectors including some of those that may be classified under infrastructure, but only for a relatively short time. Infrastructure is one of those “must haves” in life. Again, kudos to SSGA.

To be perfectly honest, SSGA, like Barclays Global Investors, is more known for relatively low cost, broad exposures with their ETFs. If I were a betting man, I would have guessed that something as unique as this new infrastructure ETF would have been brought to market by one of the new and smaller players like PowerShares, Van Eck or Claymore.

I’ve been thinking lately that maybe the ETF industry would start to diverge where the big providers (SSGA, BGI, Vanguard) would go “Wal-Mart” and stick to broad, low cost exposures while the newer entrants would focus on higher margin niche products. I guess not. Everybody’s got to watch their back. Just the way I like it.