Three ETFs To Play The Coming Emerging Market Infrastructure Boom

by on September 23, 2010 | ETFs Mentioned:

Over the past year, more investors have grown unsure of the economic future in much of the developed world. High budget deficits in the U.S., a currency crisis in Europe, and a demographic disaster in Japan have left many searching for markets with better growth opportunities. Many have flocked towards emerging markets which have become the mainstay of  investors seeking to expand their portfolios into countries with strong growth rates and sound balance sheets. While these nations have incredible potential, they face a tremendous economic obstacle in the form of sagging infrastructures. As populations continue to grow at mind-boggling rates in these nations, the individual countries will be forced to make radical changes in their society in order to accommodate the growing number of occupants who are increasingly drawn to the allure of cities where wages and opportunities are often far superior to those in the rural world [see also Playing The Emerging Markets Through Small Cap ETFs].

The population of urban-dwellers in Asia is expected to jump by nearly one billion people in a relatively short 20 year period. By 2030, China will add nearly 400 million urbanites; which is equal to moving roughly 125% of the U.S. population into Chinese urban areas in just 15 years. With major cities across the developing world facing a wave of new inhabitants, the infrastructure of these developing nations will be forced to dramatically improve in order to keep the economies from grinding to a halt.

Trillions will need to be spent on various transportation structures like roads and rail systems just to maintain current growth levels. By some estimates, China and India could combine to have more than 200 cities which will need mass transit systems in the coming years to avoid total gridlock in their most important economic centers. Meanwhile, things are not much better outside of the cities; China has just 28,000 miles of expressways, or a little less than half of the total that the much smaller (population wise) U.S. holds, leaving a lot to be desired in terms of efficient transportation across much of the country [read the Investment Case For The China Infrastructure ETF In Four Words].

According to a recent report, New York spends close to $300 per city dweller on services and infrastructure, compared to an average of $116 in China and a measly $17 for India on city residents. In order to ramp up these levels to modern standards spending will have to increase dramatically; many are calling for India to spend more than $2.2 trillion on improving infrastructure and services over the next twenty years. This would represent a 15 fold increase from current spending, but some say that this is what is required in order to pull the country into the modern age.

This necessary boom in infrastructure could be good news for various construction firms that will see a steady influx of jobs in the coming years, building up infrastructure and housing alike. For a reference point, China will need to add commercial and residential space equal to the size of New York City every two years, while India will need to add space the size of Chicago every year, with some forecasting that these trends are likely to continue for the next 20 years straight just to meet the demand of the projected population [see also Trouble Ahead For The Colombia ETF (GXG)?].

Below we outline three emerging market ETFs to take advantage of the inevitable growth in developing nations’ infrastructure:

China Infrastructure Index Fund (CHXX)

This fund measures the performance of the INDXX China Infrastructure Index, which is comprised of 30 leading companies representative of China’s infrastructure sector. The ETF’s 30 holdings concentrate on the industrial materials (44.9%) and financials (22.9%) sectors. CHXX is less than a year old, but has already seen gains over 2.5% [see CHXX's fundamentals here].

India Infrastructure Index Fund (INXX)

Emerging Global Shares‘ INXX tracks the Indxx India Infrastructure Index, which is comprised of 30 companies representative of India’s infrastructure industries. Just a few months old, INXX has been off to a great start, gaining nearly 8% since inception [see more on INXX's fact sheet].

PowerShares Global Emerging Markets Infrastructure (PXR)

PXR seeks to replicate the S-Network Emerging Infrastructure Builders Index, which is designed to measure the overall performance of companies involved in infrastructure construction and development in emerging market countries. Unlike the previous two funds, this ETF allocates to a wide variety of emerging markets, giving investors more geographic diversity. From a country standpoint, PXR concentrates on China (22.1%), Brazil (11.1%), South Africa (10.5%), and Taiwan (7.2%) [see PXR's performance charts here]. So far this year, PXR has gained over 7%.

[For more ETF insights, sign up for our free ETF newsletter]

Disclosure: Photo courtesy of David Feng. No positions at time of writing.