5 Emerging Market Infrastructure ETFs For The Coming Boom (INXX, CHXX, BRXX, EMIF, PXR)
Eric Dutram: After a brief hiatus last year, investors are once again embracing emerging markets for equity exposure. Many products in this field have seen huge inflows in 2012, far outpacing their domestic cousins in the process.
This is likely due to the declining risk environment and the ability of many emerging nations to keep inflation under control, at least for the time being. Thanks to these factors, developing nations, with their outsized growth potentials and low debt levels, seem poised to be top destinations for capital once again this year.
Yet, beyond broad funds, some investors have begun to drill deeper into the true growth segments of the emerging world. In this sphere, consumer firms are increasingly popular as more of the citizens in these nations slowly find their way into the middle class and with disposable income for the first time in their lives.
While this is a compelling trend that seems likely to continue for quite some time, many investors are likely overlooking another key growth area in the process; infrastructure (see Three Overlooked Emerging Market ETFs).
Thanks to decades of underinvestment and surging growth in transportation and trade, many emerging markets are woefully underequipped from a broad infrastructure perspective. As a result of this trend, and the relatively solid budget positions of many emerging nations at this time, many are forecasting a spending boom in order to help rectify this situation.
After all, with increased economic activity, the facilities that allow this growth to happen, be it in energy infrastructure, ports, or telecommunications, all have to be upgraded in order to accommodate the rapid increase in demand.
In fact, some analysts expect trillions to be spent over the next few decades in order allow economies to keep growth at a rapid pace. Booz Allen Hamilton (PDF) sees close to $41 trillion being spent across the world in the quarter century form 2005-2030, with $1.1 coming from Africa, $7.4 trillion from Central & South America, and $15.8 trillion in Asia/Oceania.
This suggests that emerging markets will make up well over half of the total infrastructure spending over the next two decades, meaning that it could be ideal to tilt infrastructure exposure to this region of the world (read Go Local With Emerging Market Bond ETFs).
This is especially true given the rapid pace of urbanization in much of the developing world. Currently, cities in emerging nationswelcome one million people every week, while the UN reports that 21 of the 25 biggest cities in the world will be in the developing world by 2025. Given this rapid pace of growth in cities across the developing world, many governments will have no choice but to open up their pocketbooks and pile cash into infrastructure programs, lest they be left behind their more forward-thinking peers.
These trends present investors with an intriguing opportunity for the long term. While buying individual stocks is certainly a way to go, many might be better off focusing in on ETFs for their exposure to the infrastructure sector. That is because many infrastructure companies that target emerging markets do not trade in the U.S. and thus will not be easy to invest in for most (read Five Cheaper ETFs You Probably Overlooked).
While that might be the case on the stock side, there are actually five ETFs that have an emerging market focus, allowing investors to tap into a number of different ideas in the process. For investors curious about the funds in this space, which all offer excellent exposure to the emerging market infrastructure space, we have highlighted some of the key points from each of the five funds below:
PowerShares Emerging Markets Infrastructure ETF (NYSEARCA:PXR)
For investors looking for a broad play on emerging market infrastructure companies, PXR is a solid choice. The fund tracks the S-Network emerging Market Infrastructure Builders Index which produces a fund that holds about 86 securities in total. The fund is pretty popular, having amassed about $130 million and trading a light 23,500 shares a day, although it does charge 75 basis points a year in fees (read Five ETFs to Buy in 2012).
From a national perspective, China and Taiwan take the top two spots, accounting for 19% and 12% of the fund, respectively. Beyond these two nations, Brazil (12%), South Africa (9%), and Malaysia (6%) round out the top six, suggesting a modest tilt towards emerging Asian economies.
For industries, construction firms and construction material companies take the top two spots roughly making up 45% of the fund. Steel at 16% of assets rounds out the top three, implying a focus on construction materials for this fund.
iShares S&P Emerging Markets Infrastructure Index Fund (NASDAQ:EMIF)
For a more concentrated play on the emerging market infrastructure space, EMIF represents another solid option. The fund has over $100 million in AUM but trades less than 20,000 shares a day, although it does have a similar expense ratio as PXR, charging 0.75% per year. However, the fund only holds 26 securities in its basket, ensuring that individual companies receive high weights.
In this fund, Brazilian firms receive the biggest individual weight at 31% of the total, making sure that this fund is more focused on Latin America than its PowerShares counterpart. China does occupy the second biggest spot at about 23% of the total, while no other nation gets more than 7% of the product.
There are also some key differences from an industry perspective too, as EMIF puts more weight on utility firms. Electric Utilities comprise about one-third of the portfolio, while transportation infrastructure (30%), and oil and gas pipelines round out the top three from an industry perspective (read Top Three BRIC ETFs).
INDXX Brazil Infrastructure Index Fund (NYSEARCA:BRXX)
For investors looking to make a concentrated play on Brazil’s infrastructure sector, BRXX will be tough to beat. Brazil could make for an interesting focus given the upcoming Olympics and World Cup which look to spur spending across the nation but especially in Rio.
Additionally, in a 2010 report, Brazil announced that over the next four years more than half a trillion will be spent on infrastructure, most of which was looking to go to the energy sector. Beyond this, the quality of the country’s port infrastructure also looks to need an upgrade, as it has the worst rated port and road infrastructure out of the major emerging nations.
BRXX invests in 30 securities in total, charging investors 85 basis points a year in fees. The product has about $84 million in AUM and sees a reasonable 28,800 shares a day in volume (see more at the Zacks ETF Center).
Utilities take the top sector spot at 32%, while industrials take up another quarter of the fund’s exposure. Large caps dominate the fund’s assets while there is a good breakdown between growth and blend stocks as each comprise about 40%, leaving about 16% for value stocks.
INDXX India Infrastructure Index Fund (NYSEARCA:INXX)
If investors are intrigued by the promise of the Indian economy and infrastructure build up there, INXX is a good pick. India could potentially be a major market for infrastructure services too, as the country has a massive economy, more than a billion people, and needs vast improvements to catch up to major markets in the region.
To this end, India looks to greatly expand its infrastructure programs, especially to rectify the gap in electricity production. Currently, more than 40% of the country, or roughly 400 million people, do not have access to electricity, a factor that will need to be dealt with in order for India to join the ranks of the global elite (see India ETFs on the Rise).
INXX also holds about 30 securities in total, charging investors 85 basis points a year in fees. AUM comes in at about $60 million while the average daily volume is at 17,500 shares a day. Luckily for those looking for more expansion in the electrical space, electrical utilities comprise about 14% of the fund, while construction materials take the second spot at about 13% of assets.
Beyond these two segments, mobile telecom, alternative energy, and automobile manufacturing round out the top five in industry exposure terms. However, investors should note that this fund has tilt towards large caps too, although value securities make up the majority of assets, leaving just 17% for growth firms.
INDXX China Infrastructure Index Fund (NYSEARCA:CHXX)
Given China’s impressive growth rate and the vast reserves that the country has at its disposal, CHXX could be a great choice for those seeking to make a play on continued spending in the infrastructure segment. China looks to spend almost $600 billion on grid development over the next decade, while massive investment is also planned for water systems and power plants as well.
Developments also look to stretch to port and rail systems as well, an increasingly important aspect of the country’s future growth should it look to transition further to a more consumer based economy.
This fund also tracks 31 securities in total and charges investors 85 basis points a year in fees. Assets and volume are much lower in this product though, at just under $15 million in AUM and 7,500 a day in volume.
Both of these are pretty surprising figures given that China arguably represents the biggest single emerging market destination for infrastructure spending, both today and well into the future (seeForget FXI Try These Three China ETFs Instead).
In terms of industries, real estate takes the top spot at 24% of assets, while industrial engineering, construction materials, and broad engineering each account for another 12.5% each. It should also be noted that the fund has a focus on mid cap securities, putting nearly 70% of assets in the space. Thanks to this, volatility in this fund could be higher than in some of the other products on this list.
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