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New ETFs Tackle Global Infrastructure Sector
October 16, 2008
SAN DIEGO (ETFguide.com) - New ETF product launches have been stalled by market turbulence. First Trust is the first provider to launch a new ETF since PowerShares launched their set of global sector ETFs on September 18th. The First Trust ISE Global Engineering and Construction Index Fund (AMEX: FLM) launched yesterday.
PowerShares followed suit and launched the PowerShares Emerging Markets Infrastructure Portfolio (NYSEarca: PXR) on Thursday.
At first glance, First Trust’s Global Engineering and Construction ETF looks like just another global infrastructure ETF. The iShares S&P Global Infrastructure Fund (NYSE: IGF) and the SPDR FTSE Macquarie Global Infrastructure 100 Fund (AMEX: GII) already laid claim on the infrastructure sector in 2007.
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The infrastructure ETFs, according to the fund providers, are poised to benefit from the growth in world population. It is estimated that by 2050, the world population will grow from 7 billion to 50 billion, most of which will be living in cities (by 2050).
Trillions of dollars will have to be spent to build the infrastructure to support this massive expansion. Unfortunately companies can’t cash in on projections reaching decades into the future. For now, existing infrastructure ETFs battle the financial crisis. IGF and GII are down 40% to 45% for the year.
Unlike IGF and GII, First Trust’s FLM has no exposure to utilities. GII has a 90% stake in utilities; IGF has 41% tied up in utilities. Utilities, usually considered a defensive sector, have matched the decline of the broader markets. The Utility Select Sector SPDR (AMEX: XLU) has seen 40% of its value melt away.
First Trust’s infrastructure portfolio is heavily invested in industrials. This might not necessarily be a benefit as the performance of the Industrial Select Sector SPDRs (AMEX: XLI) already mirrors the group's performance. 95% of FLM are tied up in companies like Vinci SA, ACS Actividades and Obayashi Corp. FLM consists of 68 holdings, 54 of which were issued by non-U.S. issuers. The index represents 16 countries (24% to U.S., 22% to Japan; and 8% to France).
The PowerShares Emerging Markets Infrastructure Portfolio has a 58% allocation to industrials and 36.52% to basic materials. China and South Africa represent the largest country holdings (19% and 14%) followed by Indonesia and the United States with 10% each.
First Trust’s FLM uses a linear-based capitalization-weighted methodology. The method prevents a few large stocks from dominating the index while allowing smaller companies to adequately influence index performance.
Linear weighting methodology graphic
PowerShares’ PXR employ’s a modified market-cap weighted methodology to its 57 holdings. Index components are divided into three segments: large, medium and small-cap. The weight of each segment is determined based on the number of stocks contained in the segment. IGF’s top three holdings account for 14.21%, GII’s top three holdings consume 19.22%, PXR’s top three holdings make up 12.38% while FLM’s top three holdings tie up only 8.83%.
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PowerShares charge 0.75%, First Trust charges 0.70%. Both new ETFs charge more than the existing portfolios which have expense ratios of 0.48% and 0.59% (IGF and GII).
In the long run, the linear or modified market-cap weighted portfolio might provide better diversification with more emphasis on smaller companies. For the immediate future, the entire sector is likely to sink and rise along with the major equity benchmarks. |
