Roads, Bridges Beget Solid Returns

As people in countries from Canada to China benefit from trillions of dollars spent on new roads, communications and water systems, carve out your share with exchange traded funds.

The SPDR FTSE/Macquarie Global Infrastructure 100 ETF ( GII) and the iShares S&P Global Infrastructure Index ( IGF) play into so-called infrastructure spending, which is "still in the very early stages," says James Clary, an analyst for the Kensington Global Infrastructure Fund ( KGIAX). "Going forward, infrastructure is going to be a vital part of how countries will be able to make themselves competitive."

The Macquarie and iShares funds have declined 25% and 30%, respectively, so far this year, which may make them ideal for entry, given that analysts view infrastructure spending a long-term trend. The S&P 500, in comparison, has dropped about 24 percent. Top holdings include Dominion Resources ( D), Duke Energy ( DUK), El Paso ( EP), Exelon ( EXC) and TransCanada ( TRP).

Steady returns

Connie Luecke, a co-portfolio manager for the Virtus Global Infrastructure Fund ( PGUAX), says "there is an attractive risk-return profile for the sector right now."

Luecke said infrastructure investing tends to perform relatively well in up and down markets. "Infrastructure plays have proven to be defensive because cash flows are generally steady," she says. "While there is some weakness in the market right now, there is a lot of room for growth in infrastructure over the next couple of years."

In addition to pressing needs for infrastructure spending globally, low volatility is another key draw. "Infrastructure is an asset class that offers a low correlation to other classes," says Randle Smith, also a co-portfolio manager for the Virtus Fund. "It gives you inflation protection and stable returns."

Caveats

A challenge facing many infrastructure plays right now is the market's shift away from levered companies. "They need to have debt to fund their projects, but companies that have any kind of debt in their structure have been getting rocked," says Clary. "We are buying companies with very strong balance sheets."

Another consideration is companies' operations. "There is always regulatory risk in this sector that you have to pay attention to," says Smith.

Power plays

Buying individual stocks may be a way to enter the sector. Clary especially likes Fluor ( FLR) and Foster Wheeler ( FWLT). "Both of these companies are looking to build out around energy infrastructure," he says.

Luecke and Smith also like infrastructure plays that are tied to energy. They have long-term bullish outlooks for Exelon and Spectra Energy ( SE). They think Exelon has upside potential in its nuclear power business. "Power prices are up in the U.S. primarily because coal and gas prices are up," Smith says. "Nuclear prices haven't seen these same significant increases yet."

In August, Spectra checked in with second-quarter results that included a 47% year-over-year increase in ongoing EPS as operating revenue spiked 16%.

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