GHII: The Good, The Bad And The Yield

| About: Guggenheim S&P (GHII)

Summary

GHII is a concise, high yield focused infrastructure fund.

Diversified among Utilities 54.37%, Energy 23.50% and Industrials 22.14%; all three are still very exposed to energy.

Because of the many high quality holdings, the fund has less risk than the individual company metrics indicate.

D+ is the grade given to this country's current infrastructure condition. The grade, the same A through F assigned to students, is given every four years by the American Society of Civil Engineers; the current grade covers 2009 through 2013. According to the ASCE,

... Once every four years, America's civil engineers provide a comprehensive assessment of the nation's major infrastructure categories in ASCE's Report Card for America's Infrastructure... ...An Advisory Council of ASCE members assigns the grades according to the following eight criteria: capacity, condition, funding, future need, operation and maintenance, public safety, resilience, and innovation. Since 1998, the grades have been near failing, averaging only Ds, due to delayed maintenance and underinvestment across most categories... ...The grades in 2013 ranged from a high of B- for solid waste to a low of D- for inland waterways and levees. Solid waste, drinking water, wastewater, roads, and bridges all saw incremental improvements, and rail jumped from a C- to a C+...

One might expect even poorer grades by next report card, no doubt.

This lack of infrastructure investment isn't unique to just the United States. Other advanced economies, for example, EU member states, have also neglected national infrastructure. The executive body of European Union, the European Commission has recently reported that

... To upgrade Europe's infrastructure, the European Commission has estimated that around €200 billion is needed during the current decade for transmission grids and gas pipelines. Not all investments are commercially viable however and the market alone is likely to only provide half of the necessary investment...

Leading economist have repeatedly pointed out that although advanced economy central banks have poured trillions of dollars into their respective economies, the money has no place to go. Nobel Prize Laureate, Paul Krugman, opined in a recent New York Times article that,

... Government borrowing costs are at record lows; markets are in effect pleading with the government to borrow and spend... ...It's completely crazy that public construction as a percentage of GDP has declined to record lows even as interest rates have done the same... ...we are still in or near a liquidity trap, a situation in which cutting interest rates as far as possible isn't enough to restore full employment...

One of the more notable 'conundrums' facing the U.S. Fed and a key obstacle standing in the path of rate normalization is low wage growth in spite of steady month over month increases in job growth and an unemployment at 5%. In fact, wage growth has lagged so far behind for so long that several states have recently passed legislation to legally require increased minimum wages. It begs the question as to why wages have not increased, when demand for labor is near record highs. One answer may be the lack of wage competition. If the wages accompanying open positions are as high as possible, without forcing other cost reductions for those businesses doing the hiring, it indicates that these are not, in large part, high paying skilled jobs.

Currently, the best paying jobs are mostly for professionals with advanced degrees. US News & World Report listed the top 100 ranked jobs for 2016. The top five are Orthodontist, Dentist, Computer Systems Analyst, Nurse Anesthetist and Physician Assistant. It isn't until #50, Massage Therapist, that a degree isn't required, although specialized training is and then not until #75, Sales Manager, is a type of high paying job attainable through experience and hard work; a degree perhaps desired, but not necessary. Lastly, the only blue collar related positions, Construction Manager and Police Officer, are #98 and #99, respectively.

It important to note that jobs like electrician, plumber, welder, heavy equipment operator or carpenter, even though high paying jobs, are not mentioned in those top 100. In particular, those types of job skills needed for big construction projects. What it all means is that excluding high paying degreed professionals and low paying service sector jobs, well-paying jobs simply don't exist even though there is a capable and job hungry skilled labor force available, but now likely working well below their skill levels. This is the main reasons that many central banks are urging their governments to begin infrastructure revitalization projects. Higher wages, will lead to increased consumer demand, pricing power, more production to meet consumer demand all creating self-sustainable growth and, finally, rate normalization.

So, at this point the ever alert investor is sure to be wondering just how to invest in infrastructure ahead of an inevitable build-out. There are several infrastructure funds but the Guggenheim S&P High Income Infrastructure ETF (NYSEARCA:GHII),

... seeks investment results that correspond generally to the performance, before the fund's fees and expenses, of an equity index called the S&P High Income Infrastructure Index... ...GHII will invest in the 50 highest-yielding global equity securities of companies that engage in various infrastructure-related industries...

The underlying tracking index is the S&P High Income Infrastructure Index (SPHIIUP). The constituents of the fund (and index) are selected from the S&P Global Broad Market Index. The fund classifies holdings in three groups: energy, transportation and utilities. GHII tracks the index passively; hence if it's in the index, it's in the fund.

This fund has several good characteristics: the fund and is a top performing ETF in its class. It's concise and concentrated with top performing companies. This fund also has some bad characteristics: it would be more accurate to classify it as an energy-infrastructure fund and then divided into three groups: energy, transportation and utility groups and not simply an infrastructure fund. Nearly every holding is somehow energy related, including energy investment holding companies. Hence, the fund is almost entirely exposed to the energy sector in every infrastructure way possible. Lastly, the fund has the interesting attribute for providing consistent and above average distributions without excessive risk; the trailing 12 month distribution is 4.60%

A few basic metrics are included. It needs to be noted that infrastructure construction and maintenance as well as energy producers carry high debt. The reason is simple: cash is often required 'up front' for materials and construction. Hence, the total debt-to-equity is often 'wide-eyed' high, but keep in mind that utility-infrastructure companies usually have a steady revenue stream to back up debt. They're virtual monopolies in their operation area, hence they tend to leverage up a bit more. Also, non-cash charges, like depreciation or amortization also affect earnings. No meaningful figure (NMF) indicates negative earnings, hence NMF for a P/E ratio. Of the 50 holdings, only one did not pay a dividend, RWE AG (OTCPK:RWEOY), however the company has a trailing average dividend yield of 8.80%.

In order to understand why the overall fund mitigates the overall risk, it's necessary to briefly look over the fund's holdings.

Company Name

Weighting

Market Cap

Yield

Div/ EPS

P/E

Price/ Cash Flow

Debt/ Equity

5 Year Avg ROI

Institutional Interest

TARGA RESOURCES CORP (NYSE:TRGP)

6.98%

$4.70

12.91%

86.67

28.49

9.12

409.25

5.28

35.74%

GOLAR LNG LTD (NASDAQ:GLNG)

6.18%

$1.68

1.11%

NMF

NMF

46.92

82.68

10.08

91.59%

KINDER MORGAN (NYSE:KMI)

5.78%

$39.86

2.80%

109.10

158.66

15.83

123.09

2.76

57.39%

ONEOK INC (NYSE:OKE)

4.44%

$6.27

8.24%

52.10

25.04

8.47

2674.40

6.05

79.76%

SHIP FINANCE INTL LTD (NYSE:SFL)

3.67%

$1.30

12.96%

23.08

7.11

4.62

134.20

5.33

36.15%

GASLOG LTD (NYSE: GLOG)

3.44%

$0.78

5.75%

350.00

227.30

5.13

237.05

2.41

50.08%

VERESEN INC (OTC:FCGYF)

3.20%

$2.66

11.40%

33.34

36.19

20.45

35.63

2.12

INTER PIPELINE LTD (OTCPK:IPPLF)

3.10%

$6.93

5.83%

10.16

20.96

13.82

170.37

5.78

WILLIAMS COS INC (NYSE:WMB)

2.99%

$12.05

15.93%

NMF

NMF

28.43

398.29

3.09

84.56%

NORDIC AMERICAN TANKERS (NYSE:NAT)

2.82%

$1.24

12.25%

133.33

10.87

7.13

37.47

41.70%

GIBSON ENERGY INC (OTC:GBNXF)

2.64%

$2.17

7.67%

NMF

NMF

929.20

113.66

-0.27

PEMBINA PIPELINE CORP (NYSE:PBA)

2.58%

$17.14

5.47%

15.69

34.30

21.36

44.76

3.55

WESTSHORE TERMINALS (OTCPK:WTSHF)

2.55%

$0.04

1.28%

7.77

8.42

7.85

0.00

19.06

Click to enlarge

Data from Reuters, Yahoo! and Company Websites

Kinder Morgan is the largest energy infrastructure company in North America. KMI owns and operates 84,000 miles of pipeline and 180 terminals transporting and delivering natural gas, refined petroleum products, crude petroleum and CO 2. KMI is,

... connected to every important U.S. natural gas resource play, including the Eagle Ford, Marcellus, Utica, Uinta, Haynesville, Fayetteville and Barnett...

Since KMI is the premier company in North America, it serves as the standard, against which other companies in the fund may be compared.

Likewise, Ship Finance International is the benchmark for maritime infrastructure with of 20 tankers, 22 dry bulk, 24 liners and 9 offshore rigs. The most recent share price and yield is posted on its website, at 13.04%.

A good example of a top diversified energy generating company is Veresen Inc., committed to hydro, wind and waste heat recovery in addition to traditional gas fired electric power generation. Veresen commands an 11.40% yield. Globalization has remove barriers for utilities to operate only within domestic boundaries. As a top example, Inter Pipeline Ltd operates pipeline networks in Canada, U.K., Denmark, Sweden and Germany. Lastly, it's important to note that coal is still a major source of energy, particularly in emerging market nations. However, international pressure against the continued use of coal is building. Nevertheless, the fund includes coal carries like Westshore Terminals Investment. Westshore is the leading coal-from-rail-to-port infrastructure of the fund, shipping to over 20 countries across the globe. The company has recently begun a $211.75 million (USD) infrastructure upgrade reinvestment project.

Company Name

Weighting

Market Cap

Yield

Div/ EPS

P/E

Price/ Cash Flow

Debt/ Equity

5 Year Avg ROI

Institutional Interest

DHT HOLDINGS INC (NYSE:DHT)

2.13%

$0.54

14.58%

22.34

6.14

2.93

89.78

-0.58

89.03%

TERRAFORM POWER INC (NASDAQ:TERP)

2.06%

$1.22

16.18%

NMF

NMF

57.11

208.86

NA

TRANSCANADA CORP (NYSE:TRP)

1.83%

$27.58

4.40%

NMF

NMF

67.54

214.28

2.64

60.21%

CONTACT ENERGY LTD (OTC:COENF)

1.83%

$2.47

5.20%

NMF

NMF

21.58

61.15

3.42

FORTUM OYJ (OTC:FOJCF)

1.75%

$13.24

8.26%

NMF

NMF

99.36

43.55

-1.14

DUET GROUP (OTCPK:DUETF)

1.75%

$4.06

6.52%

128.57

32.04

11.21

185.02

1.38

ELECTRICITE DE FRANCE (OTC:ECIFF)

1.73%

$21.21

11.15%

203.85

37.37

1.50

184.70

1.55

ABERTIS INFRAESTRUCTURAS SA (OTC:ABFOF)

1.67%

$15.26

4.46%

NMF

NMF

NA

464.17

1.99

CAPITAL POWER CORP (OTC:CPXWF)

1.66%

$1.33

8.11%

0.50

24.22

6.23

59.53

3.36

HUANENG POWER INTL (NYSE:HNP)

1.66%

$17.92

6.94%

39.97

5.77

3.41

202.46

6.80

3.40%

NORTHLAND POWER INC (OTCPK:NPIFF)

1.59%

$2.80

5.04%

NMF

NMF

22.96

509.92

-0.37

SPARK INFRASTRUCTURE GROUP (OTCPK:SFDPF)

1.54%

$2.67

4.58%

66.67

35.20

NA

61.44

4.55

PATTERN ENERGY GROUP INC (NASDAQ:PEGI)

1.54%

$1.38

8.23%

NMF

NMF

15.62

212.97

NA

Click to enlarge

Data from Reuters, Yahoo! and Company Websites

On the opposite end of fossil fuel energy-infrastructures, are companies such as TerraForm Power generating exclusively from renewable wind and solar power. TERP is international with operations in the U.S., Canada, Chile and the U.K. TERP is a subsidiary of SunEdison Companies (SUNE).

The fund also holds energy-infrastructure investment companies such as Duet Group. Duet Group has four divisions, each being more of a financial sector holding, but all focused on energy and energy infrastructure.

This ETF is global and this is best exemplified by Huaneng Power International. It needs to be noted that HNP is a state owned enterprise whose primary function is design, construction and operation of power generating facilities. Currently, China is in the process of restructuring its economy. This could result in near term setbacks for SOEs, however, in the longer term these large SOEs might wind up more efficient, or perhaps several more manageable, smaller independent utility companies.

Company Name

Weighting

Market Cap

Yield

Div/ EPS

P/E

Price/ Cash Flow

Debt/ Equity

5 Year Avg ROI

Institutional Interest

ABENGOA YIELD PLC (NASDAQ:ABY)

1.53%

$1.72

10.01%

NMF

NMF

27.28

404.60

-2.53

65.71%

NATIONAL GRID PLC (NYSE:NGG)

1.50%

$52.66

4.71%

27.83

17.35

9.94

216.76

4.97

5.40%

SUPERIOR PLUS CORP (OTC:SUUIF)

1.43%

$1.30

7.81%

120.00

182.86

8.46

118.99

-0.91

HK ELECTRIC INVESTMENTS (OTC:HKCVF)

1.42%

$7.75

5.89%

48.78

16.73

9.83

94.50

6.19

SSE PLC (OTCPK:SSEZF)

1.41%

$21.07

5.97%

NMF

30.38

11.47

110.36

5.14

CENTERPOINT ENERGY (NYSE:CNP)

1.34%

$9.13

4.86%

NMF

NMF

32.84

267.44

1.49

78.54%

AUSNET SERVICES (OTCPK:SAUNF)

1.31%

$4.00

5.74%

0.33

12.75

6.60

193.92

2.35

ENGIE SA (OTCPK:ENGIY)

1.27%

$32.62

7.45%

NMF

NMF

3.72

91.44

-0.59

CENTRICA PLC (OTCPK:CPYYF)

1.24%

$16.08

3.75%

NMF

NMF

4.39

508.74

1.08

SNAM SPA (OTCPK:SNMRF)

1.23%

$21.21

4.62%

71.43

15.29

9.75

181.89

5.27

ENERGIAS DE PORTUGAL (OTC:ELCPF)

1.22%

$10.67

5.99%

70.37

11.51

3.41

220.23

4.12

E.ON (OTCQX:ENAKF)

1.18%

$18.68

6.00%

NMF

NMF

3.02

107.99

-1.30

Click to enlarge

Data from Reuters, Yahoo! and Company Websites

Abengoa Yield PLC is a U.S. based renewable energy holding company but recently changed its name to Atlantica. ABY also reduced its investment in the parent company Abengoa SA, which seems to be near bankruptcy. As noted above, the fund is very concentrated in energy or energy related companies. Superior Plus is a holding company with a more diversified portfolio. At this point it's worth noting the importance which energy companies place on yield. From the Superior Plus website, the company's vision is "...to provide long-term stable dividends and premium returns to shareholders through value-based growth in core assets..."; yield is what keeps investors in this sector. There's one interesting historical note worth mentioning. HK Electric Investments established in Hong Kong in 1890 is among the oldest utility companies in existence.

Company Name

Weighting

Market Cap

Yield

Div/ EPS

P/E

Price/ Cash Flow

Debt/ Equity

5 Year Avg ROI

Institutional Interest

ENTERGY CORP (NYSE:ETR)

1.17%

$14.34

4.25%

NMF

NMF

7.39

137.22

1.93

86.04%

ENAGAS (OTC:ENGGF)

1.10%

$7.01

5.04%

45.66

15.16

9.20

188.91

6.14

APA GROUP (OTCPK:APAJF)

1.10%

$7.25

3.95%

111.76

48.95

16.74

233.88

4.30

GAS NATURAL SDG SA (OTC:GASNF)

1.06%

$19.45

5.76%

40.14

11.83

4.90

127.01

4.56

FIRSTENERGY CORP (NYSE:FE)

1.05%

$15.26

4.00%

26.47

26.44

6.32

154.51

1.30

77.09%

TRANSALTA RENEWABLES INC (OTC:TRSWF)

1.04%

$2.19

6.93%

6.36

11.58

10.42

40.08

8.28

PPL CORP (NYSE:PPL)

1.02%

$25.70

3.98%

15.97

16.02

10.10

201.27

3.92

71.69%

SOUTHERN CO (NYSE:SO)

1.01%

$47.19

4.20%

20.85

19.93

9.88

134.80

3.77

50.39%

MIGHTY RIVER POWER (OTC:MGHTF)

0.85%

$3.03

0.41%

12.50

34.76

13.68

36.40

2.15

GENESIS ENERGY LTD (NZ: GNE)

0.55%

$1.41

0.49%

14.29

28.12

9.04

42.11

2.12

RWE AG (OTC:RWNEF)

0.47%

$7.69

0.00%

0.00

NMF

1.56

326.32

0.56

INFRATIL LTD (OTC:IFUUF)

0.39%

$1.27

4.05%

166.67

106.86

7.39

140.25

4.97

Click to enlarge

Data from Reuters, Yahoo! and Company Websites

In the last table, TransAlta Renewables Inc has been generating electric power from renewable resources for over 100 years. It's currently focused on hydo, wind and natural gas generation facilities worldwide. And once again, the commitment to yield is noted:

... Our objective is to create stable cash flows and consistent returns for investors with an investment vehicle comprised of power generation assets that are fully contracted for the long-term with creditworthy counterparties...

It's also worth noting that the company's business model seems to rely on contractual investing partnerships rather than outright full ownership.

Table Averages

Weighting

Market Cap

Yield

Div/EPS

P/E

Price/ Cash Flow

Debt/ Equity

5 Year Avg ROI

Institutional Interest

100.00%

$11.14

6.46%

56.32 where applicable

33.69 where applicable

34.98

224.77

3.18

71.30% where applicable

Click to enlarge

Data from Guggenheim

Excluding non-meaningful figures and those few instances where that data wasn't available, the fund as a whole has the metrics of a run-of-the-mill energy/ energy-infrastructure company. It's also worth pointing out institutional investment interest in the companies. Although not a very precise indicator, large financial institutions put a lot of effort into 'due diligence', so a high percentage of institutional commitment is a good sign.

Returns

Year to Date

3 Months

1 Year

Since 2/11/2015 Inception

ETF Shares

6.01%

6.01%

-4.78%

-4.67%

NAV

8.62%

8.62%

-1.84%

-2.45%

Click to enlarge

Data from Guggenheim

Generally, the fund has an average expense ratio of 0.45% and is currently trading at a 0.40% premium to NAV. The fund is new, having first traded a little more than a year ago. The fund is very lightly traded, so be aware that when you're in, you're in. This is a holding for the risk tolerant and patient investor. Above all, the interested investor needs to be aware of the fund's broad exposure to the energy sector. That being said, the fund has the potential to appreciate in value, provide steady if somewhat higher risk distributions and naturally become more liquid as interest in the fund increases. Lastly, it's important to note that GHII is the top performing ETF in Seeking Alpha's ETF Hub's Global Equity/Industrials/ Infrastructure class.

What it all adds up to is an Energy-Infrastructure fund with good, bad and rather interesting characteristics.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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