The Infrastructure ETF Hype?

June 08, 2012

Global infrastructure was supposed to be one of the biggest investment themes of the decade. Has it been?

The answer, through the lens of the ETF market, is both yes and no.

But looking ahead, the answer seems even murkier as the eurozone’s problems threaten to engulf the planet, and as China’s juggernaut seems as if it might be in its first secular slowdown since Deng Xiaoping ushered in the Middle Kingdom’s glory days about 30 years ago.

But first the good news.

For the past 10 years, analysts from around the world have been hammering home the idea that the emerging world would need to spend billions to modernize infrastructure networks to be competitive on the global stage. And rightly so.

The argument was that access to clean water, cheap electricity and reliable transportation networks were keys to the future. This would mean huge profits for investors in the companies providing these services.

Then, back in 2008 when the U.S. and the global economy were staring into the abyss, a laundry list of stimulus programs was unleashed globally. That added some serious juice to a trend that was already in place.

Much of this spending was aimed specifically at infrastructure development—roads, ports or power distribution.

As such, analysts everywhere fell over each other predicting massive gains for the companies operating in these industries.

And their enthusiasm wasn’t just in the developing world, but also in the developed world. After all, the obsolescence of the roads, railways and energy grid here in the U.S. was arguably holding the world’s largest economy from fulfilling its own economic destiny.

ETF Market Response

Where there is the perception of an opportunity it seems ETF managers have always been ready to pounce.

In this case, that meant building infrastructure portfolios, and build they did.

First came the global infrastructure funds: the SPDR FTSE/Macquarie Global Infrastructure 100 ETF (NYSEArca: GII) in January 2007 and the iShares S&P Global Infrastructure Index Fund (NYSEArca: IGF) in December of the same year.

As you can see by the chart below, both funds have produced huge returns since the market bottom in March 2009, riding the wave of global stimulus and investor enthusiasm to great success.

Global since March 2009

While both funds have rocketed up since then, IGF has outperformed GII by nearly 30 percent over that time. IGF is much more of a global fund, with only 30 percent of its portfolio in the U.S. compared with near 50 percent for GII.


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