Infrastructure exchange traded funds can tempt investors and it is easy to see why. Headlines and media reports pertaining to infrastructure spending rarely contain small numbers. Large developed and emerging economies can spend hundreds of billions of dollars on infrastructure spending in just a few years.
For example, earlier this year, President Barack Obama pushed an infrastructure structure budget that called for spending for $468 billion over six years. Global infrastructure spending from 2014 through 2025 could reach a whopping $78 trillion, the Wall Street Journal reports, citing Oxford Economics and consultancy PwC.
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However, government largess when it comes to infrastructure is not a guarantee that the related ETFs will reward investors. Over the past year, the iShares Global Infrastructure ETF (NYSE:IGF) and the SPDR S&P Global Infrastructure ETF (NYSE:GII) are each down nearly 14 percent.
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S&P Capital IQ Equity Analyst Jim Corridore thinks that companies that construct infrastructure are likely to see increased demand over the next several years due to the need for upgrade and expansion of infrastructure both within the U.S. and around the world. Within the U.S., aging and outdated roads, electric transmission grids, and energy transmission facilities are in dire need of repair and replacement, according to Corridore. Meanwhile pipelines, water treatment, and rail are seeing increased demand and need for expansion, said S&P Capital IQ in a note out Tuesday.
Prior to getting involved with either ETF, investors need to do some homework. As their names imply, GII and IGF are global funds. GII, the State Street offering, is, in theory, highly levered to U.S. infrastructure spending because the US is over 35 percent of the ETF's country weight. That is more than quadruple the weight allocated to Italy, GII's second-largest country exposure.
Overall, GII features exposure to 19 countries, only four of which are emerging markets. At 5.3 percent of GII's weight, China is the ETF's largest emerging market weight. That is something to consider because for the 20 years ended 2011, China spent an average of 8.5 percent of annual GDP on infrastructure projects, more than the triple the percentages of spent in the US and the European Union.
The S&P Global Infrastructure index generated a 9.6% annualized return in the three-year period ended July 2015. However, given the strength in the US dollar relative to most currencies in the last three years, many currency hedged international approaches have outperformed those that hold just the local shares. This is one of those examples, where the currency neutralized infrastructure index was even stronger with a 13.0% three-year return. On a calendar year basis, the hedged index outperformed in 2013 and 2014, after underperforming in 2012, said S&P Capital IQ.
The nearly $1.1 billion iShares Global Infrastructure ETF tracks the same index as its SPDR rival, explaining why the ETFs' returns have mirrored each other over the past year. GII charges 0.4 percent per year compared to 0.47 percent per year for IGF. That difference does not sound significant, but it will be for investors looking to buy and hold either of these funds for multi-year holding periods.
Investors looking to mitigate currency risk with their infrastructure ETF can consider the newly minted Deutsche X-trackers S&P Hedged Global Infrastructure ETF (NYSE:DBIF). DBIF, which debuted in April, tracks an index that is the currency hedged equivalent of the benchmark followed by GII and IGF.
Due to dollar's recent decline and the US accounting for over 35 percent of its weight, DBIF has slightly outperformed its unhedged rivals over the past month.
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