Infrastructure Investment Opportunities:
Two of Our Favorite ETFs Right Now
by David Fessler, Advisory Panelist, Investment U
October 03, 2008: Issue # 865
An old Pennsylvania Dutch farmer friend once told me “Put another way, every new beginning comes from an old beginning’s end…”
What we’re witnessing today in the markets is the end of an old beginning (the housing boom and the subsequent credit crisis). And while the media, Congress and scores of others spend time pontificating, pointing fingers, and engineering “fixes,” the smart investors are making investments. Warren Buffett is certainly the most visible investor who’s out there shopping for bargains… and even though we aren’t quite as famous, we’re shopping, as well.
If you believe as I do, that the credit lockup will receive the necessary lubricants and mechanical repairs to stabilize the markets, then - as counter-intuitive and uncomfortable as it may be - you have to look beyond what’s happening today in order to spot the opportunities that will arise tomorrow.
Today let’s take a closer look at infrastructure investment opportunities. You’ve heard me speak over the past weeks about energy and infrastructure and why they’re the two greatest sectors to invest in right now. (If you’ve recently joined Investment U, check out my other columns in our archives.)
As The U.S. Infrastructure Crumbles…
Here in the United States, our infrastructure is crumbling:
- Water filtration plants need to be upgraded to the latest water quality standards.
- Sewer plants need to expel water fit to drink.
- It needs to been done not only for wildlife, but for anyone who uses the water downstream.
On the transportation side, things are in dire straits as well:
- 153,000 bridges need repair or replacement.
- 160,00 miles of roads need of resurfacing or expansion.
- Our nations airports need to have runways resurfaced or lengthened, terminals and baggage handling systems need to be expanded and made more efficient.
- Our broadband communications system (the backbone of the Internet) is essential for today’s e-commerce environment, but it’s one of the slowest and most fragmented in the world.
And that’s just here in the United States.
Infrastructure Issues Across the Globe
Many other developed countries have similar infrastructure issues. Emerging market countries need to build all of the above from scratch, as they quickly learn that good infrastructure is crucial to their economic development.
It’s estimated that the world will need to spend $53 trillion over the next 25 years on infrastructure. The World Bank estimates that for every 1% increase in infrastructure spending equates to a 1% increase in a country’s gross domestic product (GDP).
Warren Buffet’s big General Electric (NYSE:GE) purchase is essentially an infrastructure bet. GE makes wind turbines, hybrid diesel locomotives, water plant equipment, nuclear reactors, and a host of other infrastructure systems and components.
But a better way to play the space - and position yourself to properly take advantage of the upturn when it comes (and it WILL come) - are infrastructure Exchange Traded Funds, or ETFs.
2 Infrastructure Investment Opportunities In ETFs
There are a number of infrastructure ETF investment opportunities, but I’m going to show you two of my favorites.
The first, the iShares S&P Global Infrastructure Index Fund (NYSE: IGF), seeks to replicate the price and yield performance of the S&P Global Infrastructure Index. As of the beginning of October, the fund held 86 companies, with 19% of its investments in energy, 39% in utilities and 38% in industrials.
IGF has only been in existence since December 2007, but it represents a global, all-inclusive approach to infrastructure investing. Despite our domestic woes, many other areas of the world are spending big on infrastructure. About 75% of the fund’s investments are in companies outside the United States. Follow this link to learn more about IG.
The top three holdings include:
- E.ON AG, one of the world’s leading energy companies with a presence in both the U.S. and Europe.
- Transcanada, one of North America’s largest natural gas storage and transmission companies, with over 36,500 miles of pipelines.
- Abertis, a Spanish company that operates toll roads, telecommunications systems, airports and parking garages around the world.
The second, the SPDR FTSE/Macquarie Global Infrastructure 100 Fund (AMEX: GII), seeks to closely match the performance of the Macquarie Global Infrastructure 10 Index.
The Macquarie Index is heavily weighted (89%) toward companies engaged in the ownership, management and operation of utility assets, with the rest being focused on other areas of the infrastructure sector.
GII, had 99 positions as of the beginning of October, is also globally diversified with 64% of its holdings outside the United States. Follow the link for more information on GII.
Right now, you can buy both the IGF and GII at prices near their lows for the year. Rather than try to pick a bottom, it might be wise to ease into these positions. When markets are this volatile, they may have further to fall.
When things start looking up, however, the infrastructure sector is clearly a place you want to have a presence. In future articles, I’ll examine specific sub-sectors and ways to play them.
Good Investing,
Dave Fessler
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Today’s Investment U Crib Sheet
Professional traders and investors rarely purchase a new stock in one transaction. They dollar-cost-average into a position. And really, this is just a fancy term for spreading your buys over multiple purchases.
The chances are slim that we would get a day’s (or week’s) best price if you were to make a single purchase today. But, by spreading our investment into 2 to 4 purchases, we have a better chance of hitting the lowest price. And in doing so, we can lower our average cost per share.
For example:
Lets say stock XYZ trades at $30, $40, $20, $30, and $40 over the course of a day. If we were to make one purchase during the day, there is a 40% chance we would pay $40, and only a 20% chance we’d buy at $20. But if we spread our purchases out, we would pay an average price of $32.
By splitting up your purchases into smaller amounts, and buying over the course of a day or week - investing an initial 20%, 25%, or 30% of your full position amount - you can reduce the chance that you will have purchased at the high price for the period.
And investing is about reducing your risks, not playing the odds.
Alexander Green has consistently recommended against investors timing the market. And for good reason, it doesn’t work. So how does an investor, rookie or expert get the tools and learn the skills that translate into successful investing? Learn more in Investment U Issue # 705, Stock Market Timing: The World’s Best Investors Weigh In On Market Forecasting.
You can start by checking out our Investment U archives. A phenomenal resource for our e-letters from the past 6 years of Investment U, it helps rookies and veterans alike hone their skills.
Using trailing stops is one of the best ways to protect your gains. However, too often, investors don’t have the time - or the discipline - to put them into practice. But we’ve found a simple tool that can help you do this. It’s called TradeStops. And we highly recommend giving their service a try.
Related Articles:
- The Infrastructure & Energy Sectors: The 2 Best Places to Put Your Money Over the Next 20 Years
- Warren Buffett: Why Buying Constellation Energy Group Is A Sweet Deal
- Alternative Energy Investments: Finally Getting The Green Light in 2008
