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the global etf adviser

You have heard by now that Justin Trudeau and Donald Trump hope to start "infrastructure banks" and that they will boost the economy. At the simplest level, gross domestic product (GDP) = consumption (C) + investment (I) + government (G) + exports (X) – imports (M). The government's borrowing money (our kids' future income) and spending it on infrastructure will mathematically boost G + I, to be sure.

In 1952, Highway 401, which would eventually connect Windsor to Montreal, was born. Before its completion, a company in Toronto looking to sell their product to a consumer in Montreal had a distribution challenge. That 1950s infrastructure spending not only created a job, it then created a tremendous boost to commerce for decades. By contrast, fixing the potholes and bridges on the 401 – or Interstate-75 for that matter – will create a job for the period it's fixed, but no additional benefits. The leverage in borrowing from the future necessitates additional benefit or it's money not well spent. This is the main difference in infrastructure spending today versus the golden age (1946-1973) when that road or bridge did not exist and the spending created a multiplier effect on GDP for decades. Nowadays, a new terminal at any airport in the world that replaces an old terminal may promise to make the voyage more pleasant, but the queues are not any shorter and the flights are not any faster.

Productivity will come back in the coming decades, but it will be from significant job loss as technology replaces many services and production. Productivity is defined as output per unit of labour. The last time I was in a McDonald's, there were computer screens asking if I wanted McFries with that. That front-line cashier's job will never come back, and neither will the coal miner's job or assembly-line job in Michigan. We do need to teach that newly unemployed worker how to program the code to compete for that job creating McDonald's new customer front line in the future. Those Rust Belt workers that voted for Mr. Trump need to adapt to the current developing economy. Spend money there and the president-elect has my support; telling the down and out their old jobs will come back is at best naive, at worst a lie.

Modern-day infrastructure spending should be spent in part on educating citizens to compete for the jobs of the future, not fixing potholes. That said, the Center on Budget and Policy Priorities says the United States needs to spend $3-trillion (U.S.) just to fix what is broken, never mind any new projects that could create commerce.

Exchange-traded funds that focus on "infrastructure" will not benefit much at all from these so called infrastructure banks you have heard about. The private capital governments are seeking to partner with will benefit the most, because it's the profitability of fixing the roads and bridges that matter. Owning the new toll road will be profitable too, but none of this is owned in infrastructure ETFs.

The two ETFs we spotlight in the table below – BMO Global Infrastructure Index ETF (ZGI) and iShares Global Infrastructure ETF (IGF) – are the largest global infrastructure ETFs in Canada and the United States.

The sectors covered by these ETFs are very interest-rate sensitive, so if inflation does creep in (which I doubt), they will suffer (as we have seen recently). The majority of these are pipelines (no government spending here), utilities (some investment into electricity and water, but it will not add to the bottom line for utilities). Some of the industrials will benefit a little, but here, too, we see some airports and shipping ports that will not benefit from bridges and potholes being fixed.

The main Canadian and U.S. companies that would benefit from the engineering side of things – SNC-Lavalin Group, Aecon Group, Jacobs Engineering Group and Fluor Corp. – are not even in these infrastructure ETFs.

Don't just get caught up in the rhetoric or the trade of the day. Look through the ETF and see what you are buying and understand your risk. I say this every week and few people do enough homework. These infrastructure ETFs and their juicy dividends are highly sought after, but they are not cheap, and they will not benefit from the coming spending spree. I've been nibbling on BMO Covered Call Utilities ETF (ZWU), which owns some Canadian and U.S. pipelines and utilities (and which are also in ZGI), but I'm not buying them for their growth properties. I'm buying them because they are more defensive and my models are telling me the post-Trump bump is a reason to get defensive in portfolios, not aggressive.

Larry Berman is co-founder of ETF Capital Management. He is a Chartered Market Technician, a Chartered Financial Analyst charterholder, and is a U.S.-registered Commodity Trading Advisor.

Infrastructure ETFs/sectoral weightings

ETFSymbolEnergyIndustrialsUtilitiesReal EstateTelecomOther
BMO Global Infrastructure IndexZGI-T41.40%1.60%40.80%13.90%2.30%0%
iShares Global InfrastructureIGF-Q20.70%39.70%39.30%0%0%0.28%

Source: Larry Berman