(10/06/15) Building Value with Global Infrastructure

Once every four years, America's civil engineers provide a comprehensive assessment of the nation's major infrastructure categories. The latest report card has a poor cumulative GPA for infrastructure of D+, asserts Todd Rosenbluth of S&P Marketscope.

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 US and around the world.

Within the US, aging and outdated roads, electric transmission grids, and energy transmission facilities are in dire need of repair and replacement, according to Corridore.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.

Infrastructure spending is not just a US endeavor. In mid-May, Japan announced a $100 billion plan to invest in roads, bridges, railways, and other building projects in Asia.

Meanwhile, a meeting for the China-backed Asian Infrastructure Bank, initially funded with $50 billion, kicked off this summer and included nations as diverse as the Australia, Italy, the Philippines, and the UK.

The S&P Global Infrastructure index seeks to provide broad-based exposure to infrastructure through energy, transportation, and utility companies in both developed and emerging markets.

Nearly two thirds of its assets are domiciled outside of the US, with China (5%), Japan (4%), Italy (8%), Spain (5%), and the United Kingdom (7%) among the ten largest countries.

While it is impossible to invest directly in an index, the S&P Global Infrastructure index is tracked by two US-listed ETFs

SPDR S&P Global Infrastructure (GII) is smaller of the duo, but it has a lower expense ratio (0.40%). The iShares Global Infrastructure (IGF) is the other and it trades with a tighter bid/ask spread.

From an industry perspective, transportation infrastructure (40% of assets) is well represented in these two ETFs, but this is partially offset by stakes in electric utilities (22%) and oil, gas, and consumable fuels (20%) companies.

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.

Meanwhile, from a risk perspective, the three-year standard deviation for the hedged S&P Global Infrastructure index was 20% lower.

A new ETF was launched in April 2015 to track this hedged index. Deutsche X-trackers S&P Hedged Global Infrastructure ETF (DBIF) is much smaller and trades much less frequently than GII or IGF, but has a tighter bid/ask spread. The underlying stock holdings are the same as the two other ETFs.