Opening the door for retail

The first exchange-traded fund (ETF) – the S&P 500 Directory Receipt (SPDR) – was introduced in 1993 by Nathan Most of State Street. In the interceding timespan, thousands of ETFs have been launched worldwide and there are now more than $2 trillion in assets traded annually through ETFs.

This flooding of the market with both actively- and passively-managed funds has seen ETFs created for every imaginable sub-sector, bringing retail investors into spaces they’ve previously found impenetrable. In the infrastructure space as with others, this phenomenon is altering the landscape of investment.

And while John Bogle, who launched the first passively-managed indexed fund in 1975 – the Vanguard 500 – in a recent Financial Times op-ed said that ETFs’ ability to meet the needs of long-term investors are dubious at best, there are those who would disagree with that assessment.

“I do not entirely agree with him,” said Zacks Investment Research’s ETF research director Neena Mishra in an interview. “[ETFs] provide a low-cost, convenient, transparent way of replicating market returns to long-term investors.”

Beyond plain vanilla

Mishra said the ETF industry has grown beyond “plain vanilla ETFs,” and many new offerings provide access to specialised strategies otherwise unavailable to retail investors.

“At the same time, investors should be aware that some of these specialised strategies are not buy-and-forget strategies,” she said.

While Mishra said she is currently bearish on the US utilities sector given the possibility of Federal Reserve rate hikes later this year, she believes funds with global portfolios and those with exposure to emerging markets are particularly attractive.

One new globalised fund is the Guggenheim High-Yield ETF (GHII), launched on February 3, which tracks the S&P High Income Infrastructure Index. GHII is unique in its weighting, which is yield-based rather than market capitalisation-based. The ETF tracks 50 top-performing infrastructure funds within its index, with asset holdings of $173.51 million as of March 19 and an expense ratio of 47 basis points.

Guggenheim’s managing director of product development, William Belden, noted in an email interview that GHII utilises a strategic beta approach in an attempt to capture steady cash flows and maximise income.

Only 20 percent of the securities tracked by GHII are based in the US, and with its global focus on a landscape that is flush with liquidity in markets such as Europe, Japan, China and India, it is unlikely that any future rate cuts in the US would have a significant impact on the fund.

Another fund making waves of late is the EGShares India Infrastructure ETF (INXX), which at the start of March was up 4.9 percent year-over-year, according to ETFDB.com, where INXX was rated as the fifth-most attractive infrastructure ETF on the market. The fund’s 30 holdings maintain roughly $88 million in assets with an expense ratio of 85 basis points.

Other staples of the infrastructure ETF space are the State Street SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII) and the iShares S&P Global Infrastructure Index Fund (IGF), introduced in January and December of 2007, respectively, which stand as two of the top-performing infrastructure ETFs in the space.

GII tracks 86 funds with holdings of $117.75 million with an expense ratio of 40 basis points. IGF holdings, meanwhile, far surpass those of other ETFs in the space at $1.166 billion of assets, though the fund also has a higher expense ratio of 47 basis points.

With these developments in the ETF space, fund managers and institutional investors can likely expect to find themselves investing alongside a new batch of retail investors without huge amounts of capital to throw around but which are nonetheless looking to cash in on the slow and steady growth that the infrastructure sector offers – though Bogle would recommend they avoid the urge to “trade all day long in real time”.