I have talked about how important infrastructure is before, and how the United States is in dire need of an overhaul. I think the US floodgates for infrastructure spending are at most 3 years away from blowing open completely, unless a methodical infrastructure upgrade plan is rolled out. Either the money is spent over time efficiently, or it is hastily thrown at inefficient projects due to pressing need. Limiting yourself in the long-term to the United States is not the best decision though. I do not just mean emerging economies, but other developed economies as well. I don’t think roads and power lines are high up on Europe’s list of to-dos right now, but they will be once they breakdown.
In doing my research for this, I narrowed it down to two different kinds of ETFs that will give you the broadest exposure. Each is “safe” because of the diversity it allows, but one focuses on the developed world and the other on the developing world. The developing world is probably the safer infrastructure investment, and I will discuss why later. I believe the developed world will need to spend heavily, however many have been saying that for years. The massive amounts of spending have not materialized yet, and that is why I would temper any developed economy investment with emerging economies.
The Developed World has Delayed too Much
SPDR FTSE/Macquarie Global Infra 100 (NYSEMKT: GII) is my developed economy ETF of choice. This ETF focuses primarily on the US and Europe. This is a good place to get United States exposure rather than trying to find specific stocks like those mentioned in my last infrastructure article. You should look at the breakdown of the holdings. I like that the weight is heavily on the United States. Almost 50% of the ETF is US-based, though I suspect some of those are just listed on US exchanges but still foreign companies.
The reason I like the US focus is because I think the infrastructure bill that the President wants to pass will get eventually get passed. The important thing here is that I expect substantially the same bill to be passed even if we have a new president after November. Despite the battles being fought in Congress, the bill is needed. It may not be what America needs fiscally, but the effect on jobs and seeing the condition of our roads, electrical grid, and water distribution system it cannot be denied that the bill would be good for the country. That is why I think the “battles” are just a lot of political posturing to score points. I might be wrong, but I do think an infrastructure bill will be passed. This ETF with its heavy US weight will be able to capture the benefits.
On a longer timescale after Europe rights itself, infrastructure spending will increase there too. It might not be an infrastructure boom, but going from a trickle to a stream is enough to make an impact. This is the course I see for the developed world for the next 5 to 10 years. Do not grab this ETF for a 6 month turnaround. It just won’t happen. Political brinksmanship and empty treasuries might mean the infrastructure boom is a ways off. It might come down to a big catastrophe like one of America’s structurally deficient bridges collapsing. Hopefully, the government thinks long-term, but if they think short-term the long-term will eventually kick them in the shin. I hope it does not look like that recent Final Destination movie.
One final thing I like about the ETF is that only 1/3 of its assets are in the top 10 holdings. It picks its favorites, but still has 2/3 devoted to other companies. I think it is important to be as broad as possible. I cannot speak for Europe, but one of the few things I learned getting my political science degree is that states and municipalities play favorites. If the company is stationed locally, and uses local workers and suppliers it is likely to get some favorable treatment. To benefit from increased government spending, geographic breadth is needed even within the nation. Europe might not have this problem, and I doubt the fund manager’s rationale even resembles mine. Still it is something I noted, and liked.
The Emerging Economies Need to Build as their People Prosper
As emerging economies bring their people prosperity, those same people will expect their government to provide basic services. Since they pay taxes on their incomes, the people will want to see it put to use on public goods. Emerging economies that are export driven tend to have lots of cash to spend on big public works project. More than that they lack the fixed expenses in their budgets that eat at discretionary funds. Not to pick a side on the debate but look at an informal breakdown of mandatory spending for the United States. The federal government basically has no control over 60% of the yearly budget. That number will go up as tax revenues shrink or mandatory programs grow, meaning the federal government has less discretionary income. For better or for worse emerging economies lack these obligations, which allows them big public works projects that the United States simply cannot match.
My ETF of choice for emerging economies is iShares S&P Emerging Mkts Infrastructure (Nasdaq: EMIF). Regional exposure is about split evenly between Latin America and Asia, which are the two regions I and many others like best. Africa will have its day, but it’s not yet. Asia is a well-known rising star, and Latin America has been in Asia’s shadow for too long. There are many positive signs in Latin America, like the oil boom in Brazil or Chilean wine. That second one is only half facetious.
There is a reason I do not like country-specific ETFs for infrastructure spending. There are a few out there. Infrastructure spending is uneven, and is prone to more graft than other industries. I am speaking from the perspective of the investor. Whenever large government expenditures are involved in developing countries the specter of corruption looms large. The solution is as always, diversity. The most companies in the most countries that can be reasonably invested in. This ETF does not do that perfectly, though I still think it is the way to go for an emerging economy infrastructure ETF.
Two countries make up 50% of the weight of the index. They are Brazil and China, with Brazil being slightly heavier. I do like that Brazil tops the list, because I think China is over-hyped and overextended. India is left off the list, though considering the government’s problems there I cannot blame the fund manager. The top 10 holdings account for almost 68% of the assets, and only 38 total holdings. There is one other emerging economy infrastructure ETF that does have more companies, but it has less assets and has China as its heaviest country. Its second heaviest is Taiwan, and that country’s fortunes are now tied to the mainland’s. I may not get as much diversity as I want with EMIF, but its got a respectable year-to-date return of 15.19%.
Conclusion
Most of what needs to be said has been said. Just keep in mind the risks of these infrastructure ETFs. A lack of resolve to make needed upgrades in the developed world might push back any benefit, and there could be a small chance that spending is such a trickle that the job gets done without providing adequate financial gain to the companies, basically just keeping them on life support. There is substantial political and macroeconomic risk for both ETFs, but I think it is substantially greater for the developed economy ETF. It is weird that infrastructure flips conventional logic on its head. The riskier investment is in developed economies, while booming emerging economies are safer when it comes to infrastructure. Even if bubbles get popped, the people who made it out with money will still want basic services in those economies. I do not believe there is any timing these ETFs. It is just about making a choice and executing. At least these ETFs are safer than trying to pick specific infrastructure stocks that will benefit.
Fundamental Analysis