Breaking Down The Infrastructure ETFs

by: Gary Gordon

You may have heard some of the statistics before. Less than 10% of Brazil’s roads are paved. More than 1/3 of India’s population lives without electricity in the home. And roughly 50% of Indonesians in the city of Jakarta (50%) do not have running water.

In essence, if emerging markets are going to genuinely emerge, they’ll need to modernize. What’s more, the changes will need to be epic, not cosmetic. We’re talking bridges, airports, power plants, 21st century plumbing, Internet connectivity and a whole host of things that developed world denizens may take for granted.

In truth, infrastructure investing is not a new concept to exchange-traded fund enthusiasts. There are 7 ETFs with “infrastructure” in the title, and at least a half-dozen more that should.

Perhaps surprisingly, none have performed particularly well over the last few years. The underwhelming achievement has occurred in spite of the well-documented need.

Infrastructure ETFs Struggle To Get On Track
iShares S&P Emerging Markets Infrastructure (NASDAQ:EMIF) 0.7%
iShares S&P Global Infrastructure (NYSEARCA:IGF) 0.1%
SPDR Macquarie Global Infrastructure (NYSEARCA:GII) -0.2%
EG Shares Brazil Infrastructure (NYSEARCA:BRXX) -6.7%
PowerShares Emerging Markets Infrastructure (NYSEARCA:PXR) -24.9%
EG Shares China Infrastructure (NYSEARCA:CHXX) -25.6%
India Infrastructure Fund (NYSEARCA:INXX) -30.1%
S&P 500 SPDR Trust (NYSEARCA:SPY) 9.5%
Vanguard Emerging Markets (NYSEARCA:VWO) -14.9%
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Most notably, iShares S&P Emerging Markets Infrastructure (EMIF) outpaced PowerShares Emerging Markets Infrastructure (PXR) by more than 250 basis points. In addition, Infrastructure ETFs that have fared better on a year-over-year basis are more heavily tied to the non-cyclical sector of “utilities.”

For instance, SPDR Macquarie Global Infrastructure (GII) has a high 1-year correlation with iShares Global Utilities (NYSEARCA:JXI) while iShares S&P Emerging Markets Infrastructure (EMIF) has a near perfect 1-year correlation with PowerShares Global Water Resources (NYSEARCA:PHO). In contrast, PowerShares Emerging Markets Infrastructure (PXR) has a near perfect correlation with SPDR Emerging Asia (NYSEARCA:GMF).

PXR 1 YearClick to enlarge
(Click to enlarge)

In essence, there are two types of “Infrastructure ETFs.” The first will move in the general direction of a global utilities index or a sub-sector index like water/water services. If you believe in the need for basic utilities in developing and/or developed nations, you might choose from iShares S&P Emerging Markets Infrastructure (EMIF), iShares S&P Global Infrastructure (IGF) or SPDR Macquarie’s Global Infrastructure (GII). Note: You might also use Powershares Water Resources (PHO) since it trades more frequently.

The second type will travel in the general direction of BRIC (Brazil, Russia, India, China) stock indexes, where the big four also dominate the broader MSCI Emerging Market Index. Indeed, PowerShares Emerging Markets Infrastructure (PXR) and EG Shares China Infrastructure (CHXX) are unlikely to deviate markedly from more widely traded, broader emerging market funds. It follows that an “alpha-seeker” will see similar results — good or bad — to a BRIC ETF.

The lessons? You can shift between non-cyclical infrastructure (i.e., utilities, telecom, etc.) and cyclical infrastructure (e.g., materials, industrials, etc.) depending on the economic environment abroad. And, an exchange-traded label won’t tell you what’s really under the hood.

Disclosure: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.