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.
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.
In place of the extra U.S. exposure is additional exposure to Europe, something that has contributed to IGF’s inferior performance in the past year.
After all, with austerity plans either in place or about to happen in much of Europe, it stands to reason that less infrastructure spending is on the way.
Sure, the companies in these two ETFs are all multinational behemoths with large footprints in Asia and South America, but it still stands to reason that European economic weakness will weigh more heavily on IGF’s portfolio than GII’s.
Both of these portfolios are heavily focused on the developed world, with over 50 percent of portfolio assets by weight in Europe and the U.S. This has been a boon to investors since 2009.
Newer ETFs Targeting The Developing World
But for long-term investors looking for exposure to the emerging world, there are other choices.
The iShares S&P Emerging Markets Infrastructure fund (NYSEArca: EMIF) and the PowerShares Emerging Markets Infrastructure Portfolio (NYSEArca: PXR) both offer investors exposure to firms with the largest footprint in the emerging world.
Moreover, the two funds look very different, with EMIF heavily concentrated in China and Brazil—more than 57 percent of assets by weight—while PXR is spread much more evenly across the emerging world.
There are also three single-country infrastructure funds aimed at the emerging economies of the world.
Emerging Global Advisors has a fund for India (NYSEArca: INXX), China (NYSEArca: CHXX) and Brazil (NYSEArca: BRXX). As you can see, since the launch of INXX in 2010, the performance of all of these funds has varied dramatically.
The thing that sticks out most is the terrible performance of INXX, which is down 37 percent since inception.
The Indian market has been a bloodbath for infrastructure investors, while the Brazilian infrastructure market, as measure by BRXX, has been the best performer of the three BRIC nations. This has helped EMIF outperform PXR by more than 15 percentage points, and its 7 percent return since August 2010 is the best of the lot.
The past year, however, has been extremely unkind to all of these emerging markets infrastructure portfolios.
All five of these developing world infrastructure funds are down in the past year, and INXX continues to lag its BRIC brethren.
It seems that the culmination of stimulus programs in the emerging world, combined with concerns over global growth, has wreaked havoc on these portfolios.
Less fiscal participation in the infrastructure market combined with less economic activity is calling into question the sustainability of this profitable trend for investors.
So while the case for global infrastructure has been made ad nauseum, the recent performance of ETFs targeting this theme calls into question the viability of the strategy moving forward.
For long-term investors, this may prove just a bump in the road or, better yet, a fantastic buying opportunity.
On the other hand, investors looking for shorter-term value in the space would do well to consider avoiding the theme until global economic stability returns.
With the European debt crisis gaining steam, Greece threatening to leave the eurozone and China so concerned about growth that it just cut rates, don’t hold your breath.