Materials, Infrastructure ETFs Look Good

02/17/2010 10:31 am EST

Focus: ETFS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Benjamin Shepherd, associate editor of Personal Finance, says ETFs’ appeal is surging, and he likes two that focus on rising global demand for infrastructure and materials.

Since Standard & Poor’s Depositary Receipts (NYSE: SPY) hit the American Stock Exchange in 1993, the universe of exchange traded funds (ETFs) has exploded.

Although open-end mutual funds still vastly outnumber ETFs, if current trends continue, ETFs could overtake mutual funds in assets under management by the end of this decade.

True to their roots, most ETFs passively track an underlying index such as the S&P 500 or the Russell 2000. But about ten years ago, asset managers began creating custom indexes that have evolved to track almost every asset class, a multitude of industries and various sub-markets in almost every market in the world.

ETFs make it possible for investors to track many trends and investment ideas, with built-in diversification and extremely low costs. Infrastructure is [an important] global mega-trend. The economies of China and India continue to grow, all the while undergoing rapid urbanization.

Existing infrastructure has been taxed mightily in both countries; burgeoning transport, power, and other utilities require significant investment to keep pace with populations that are more mobile than ever.

These realities have pushed infrastructure spending estimates up from $1.25 trillion annually in 2007 to $2.25 trillion over the next three years. Merrill Lynch analysts forecast that China alone will spend around $725 billion annually, followed by Russia at $325 billion and India at $240 billion.

There are three infrastructure ETFs traded in the US; our favorite is iShares S&P Global Infrastructure (NYSE: IGF).

IGF holds a nice mix of US and European firms that offer some of the best infrastructure development expertise as well as a variety of global utilities and energy outfits.

Using a capitalization-weighted index, the fund is heavy on utilities such as E.ON AG (OTC: EONGY), Iberdrola SA (OTC: IBDRY), and RWE (OTC: RWEOY). Holdings also include several Macquarie subsidiaries and small positions in tanker [master limited partnerships].

Finally, materials firms will continue their recovery after being harshly punished in the recession. Commodity demand is a key driver, and huge imports of copper and coal have driven increases in spot prices, fueling a rally in materials stocks.

With stakes in miners such as BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RTP), steel producers such as Posco (NYSE: PKX), and fertilizer giant Potash Corp of Saskatchewan (NYSE: POT), iShares S&P Global Materials (NYSE: MXI) offers exposure to the gamut of materials companies.

Also employing a capitalization-weighted index, the ETF favors the larger operators. It also experiences surprisingly low volatility. iShares S&P Global Infrastructure and iShares S&P Global Materials are buys under $38 and $70, respectively. (IGF closed below $33 Tuesday, while MXI closed above $59—Editor.)

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