Three ETFs To Play America’s Crumbling Infrastructure

by on August 9, 2010 | ETFs Mentioned:

With pathetic levels of job growth and declining consumer confidence, many investors worry that the economy is dangerously close to falling into a double dip recession. This concern over the immediate future has led many to overlook a long-term problem that is getting worse every year and could eventually stand as a significant hurdle to economic growth; much of the infrastructure in the U.S. has aged considerably, and is in desperate need of upgrades. 

Although there have been recent plans for high-speed rail and road improvements, as well as continued investment from the recent stimulus bill, some believe there is still a long ways to go. The United States currently has one of the worst infrastructure systems for a developed country, and needs to quickly ramp up spending in order to continue to be able to easily transport goods and people around the nation. According to the Infrastructure Report Card put out by the American Society of Civil Engineers, America’s infrastructure grade is a “D,” and we would need at least $2.2 trillion over the next five years in order to get this grade up to an acceptable level. According to a recent report, this large gap can largely be attributed to the nation’s lack of spending on the sector in favor of social programs and increased military spending; the U.S. is quickly falling behind other countries both developed and developing:

Infrastructure spending as a percentage of Gross Domestic Product (GDP), has declined by 50 percent since 1960. The United States is currently investing less on infrastructure as a percentage of GDP than Europe, China, and many emerging economies. In total, emerging economies alone are likely to spend $1.2 trillion on infrastructure in 2008. America spends only about 2 percent of GDP per year on infrastructure investment (this includes federal, state, local, and private-sector spending). By contrast, that number is about 5 percent in Europe and between 9 percent and 12 percent in China. In developed economies, the average is about 3 percent of GDP, and for developing economies it is around 6 percent. While the United States is trying to make a dent in its massive repair bill, other countries are lapping us in new investment — further shrinking the competitiveness gap between America and the rest of the world.

According to the Report Card, among the worst sectors of America’s infrastructure are drinking water, inland waterways, levees, roads, and wastewater, all of which are given a grade of “D-” by the site. If the U.S. hopes to remain competitive globally–especially against rising powers who have put a premium on infrastructure development and now have boast some of the most modern airports and rail networks in the world–an increased focus on infrastructure is a must. Below, we profile three ETFs that could benefit from an infrastructure boom:

iShares S&P Global Infrastructure Fund (IGF)

This iShares fund invests in global infrastructure companies with a special focus on firms in Europe. The fund allocates just 25.3% of its securities to the U.S., with the next highest weightings going towards Canada (9.7%), Australia (8.3%), Germany (8.2%) and France (7.8%). In terms of sectors, utility firms dominate the list by making up just over two-fifths of the fund’s total assets, followed closely by business services (28.2%) and energy (14.6%). IGF is down slightly so far in 2010 but has surged higher in recent weeks, posting a gain of more than 8% over the past three months [also see Nine Twists On Sector ETF Investing].

SPDR FTSE/Macquarie GI 100 ETF (GII)

This fund tracks the Macquarie Global Infrastrcuture 100 Index, a benchmark designed to reflect the stock performance of companies within the infrastructure industry, principally those engaged in management, ownership and operation of infrastructure and utility assets. The fund is very heavy in utilities, which make up more than 80% of total assets. In terms of geographical representation, the U.S. takes the top spot with about 40% of holdings; Europe is in second with 35% and Japan is in third at about 11%.  So far in 2010, GII has lost about 5% but has gained sharply over the past three months as equity markets have rebounded [see more fundamentals of GII here].

Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (GRID)

For investors who are especially concerned about America’s energy infrastructure weaknesses, GRID offers a compelling choice. The fund follows the NASDAQ Clean Edge Smart Grid Infrastructure Index, a benchmark that tracks the performance of common stocks in the grid and electric energy infrastructure sector. The index includes companies that are primarily engaged and involved in electric grid, electric meters and devices, networks, energy storage and management, and enabling software used by the smart grid infrastructure sector. While the other two funds on this list focus on larger and more utility-centered companies, GRID has a heavy focus on small caps– just 23% of the fund goes towards large and  giant sized firms– and the hardware and industrial materials sectors which make up 25.4% and 45.1% of the fund, respectively [also see Beyond XLU: Three Utility ETFs Worth A Look].

For more ETF ideas make sure to sign up for our free ETF newsletter.

Disclosure: Eric is long GII.