ETF Expert

These days, the nebulous concept of "infrastructure" is being highly touted by investment advisers. Indeed, it received special recognition throughout the Obama campaign. And big names like El-Arian have proffered infrastructure as an asset class unto itself.

That part is fine… I can accept a supposed new asset class. Philosophically separating out infrastructure doesn't realllllllllllly bug me, even though I see assets falling into 1 of 3 categories (i.e., share ownership, debt, hybrid).

What does bother me is the fact that infrastructure investing in the ETF world isn't uniquely distinct in price movement from tried-and-true utility ETFs. And yet, many who read that they should invest in the sparkling new asset class are falling victim to "word play."

The most prolific ETF providers, State Street and Barclay's, have each provided their respective versions of what it means to invest in "infrastructure." The iShares Global Infrastructure Index Fund (IGF) tracks 75 companies around the globe. (Of course, the index tracks the price movement of "stock ownership," so it's hard to view this investment as covering a separate asset class.)

Each company tracked by IGF engages in some form of utilities, energy or transportation infrastructure. These are companies that create roads, airports, sewage treatment plants, potable water and power grids. Not surprisingly, 40% of the companies are utilities.

Theoretically, then, the iShares Global Infrastructure Index Fund (IGF) should have a heavy utilities slant, but energy and transportation companies should make the investment "special." Moreover, the international focus should further differentiate IGF from the pure sector choice, iShares Dow Jones Utilities Fund (IDU). 

I suppose one can argue that, after just 11 months, Utilities (IDU) is 1250 basis points away from Infrastructure (IGF). Therefore, the investments are sufficiently "different."

However, I see investments moving in perfect lock-step until the oil bubble burst in the summertime; that is, these investments are both stock-based investments… not distinct asset classes. Moreover, the correlation (directionality) is so high, it's difficult to see where one is getting any form of diversification. (Not across asset classes, and not across different economic segments.)

What about State Street's Macquarie GLobal Infrastructure 100 Fund (GII)? How different is it from State Street's Select SDPR Utilities Fund (XLU)? Here's a 2-year chart… and you tell me!

My point here is relatively straight-forward. As far as infrastructure in the stock market goes, SPDR Utilities (XLU) or Dow Jones Utilities (IDU) gives you what you need. It also gives you a 4% dividend right now.

If you're looking for infrastructure via other asset classes, you'd probably do best to buy the debt or preferred shares of utilities like Constellation Energy.  The company that Buffett bought currently offers a preferred share CEG-A with a yield-to-call that is in the neighborhood of 12%.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.