By ETF Heat Map Team
A recent study conducted by McKinsey Global Institute indicated that since the last financial crisis, investment in infrastructure went down in 10 of the most prominent economies. However, countries such as China, Japan, France, Turkey, Germany, South Africa and Canada have been increasing their infrastructure development spending as a % of GDP. They have been doing this by constructing more bridges, roads, and sewerage systems etc. It appears to be prudent, as many analysts from all over the world are suggesting that the timing is ideal for countries to invest in infrastructure given to the low interest rate environment. As such, we preview Infrastructure ETFs that one should own in a portfolio context to provide inflation adjusted returns:
- GII – SPDR S&P Global Infrastructure ETF
- EMIF – iShares Emerging Markets Infrastructure ETF
- PXR – PowerShares Emerging Markets Infrastructure Portfolio ETF
The SPDR S&P Global Infrastructure ETF, a State Street Global Advisor product, seeks to return performance of the S&P Global Infrastructure Index. It has returned approximately 14% YTD and approximately 7% over the past five years. It has a 30 day SEC yield of approximately 3% and an expense ratio of 0.4%
EMIF, the iShares Emerging Markets Infrastructure ETF, seeks to track the investment results of an index composed of 30 of the largest emerging market equities in the infrastructure industry. It has produced approximately 54% since inception and approximately 16% YTD. It has a 30 day SEC yield of approximately 1.65% and an expense ratio of 0.75%.
PXR, the PowerShares Emerging Markets Infrastructure Portfolio ETF, is based on an Index that is designed to measure the overall performance of securities of companies involved in infrastructure construction and development in emerging market countries. It has a 30 day SEC yield of approximately 1.15% and an expense ratio of 0.75%. It has produced approximately 16% YTD and its top three holdings include China Communications Construction Co, Taiwan Cement Corp and Atlas Copco.
Moving back, one of the best ways for any economy to be able to fund its infrastructural projects is by sourcing it through internal funding such as raising tolls. According to McKinsey Global Institute’s report, economies can also encourage the private sector to invest in infrastructure by putting in place regulations that in a way reduce risk on return and increase certainty. A proven model is the Public – Private Partnerships (P3s). They are a long-term performance-based approach to procuring public infrastructure where the private sector assumes a major share of the risks in terms of financing and construction and ensuring effective performance of the infrastructure, from design and planning, to long-term maintenance.
The benefits of investing in infrastructure tend to have always outweighed the disadvantages especially in the current years when the interest rates have been on a decline. The fact that giant economies such as the United States are experiencing infrastructural deterioration raises lots of questions about the sustainability of the economy. Fiscal policy requiring government expenditures on infrastructure might be the answer.
The main issue here is not on whether such countries should go into infrastructural development but on how the policy framework should be formulated. Efficiency and transparency are important factors that must be enforced since they shield the investments against unnecessary losses.