Under The Hood: A Constructive Construction Play?

As has been said so many times in the past, the exchange traded products universe has grown so rapidly that there are bound to be a few ETFs and ETNs that fly under the radar. That's the lay of the land and that's the point of “Under The Hood”: To unearth some hidden ETF gems that aren't getting a lot of press. While First Trust is the fastest-growing among the top-10 U.S. issuers and bears the label of being the most prolific in terms of new product introductions in 2011, like any other large ETF issuer, the firm has a couple of funds that seem to always stay out of the headlines. One such fund is the First Trust ISE Global Engineering and Construction Index Fund

, today's “Under The Hood” candidate. At its core, FLM is a global infrastructure play and as we noted in late May, Bank of America Merrill Lynch is forecasting global infrastructure spending of $6 trillion over the next three years. In First Trust's own words, FLM tracks an index that “specifically targets companies that are engaged in large civil and capital projects such as infrastructure, utilities, transportation, telecommunications, commercial, residential, and commerce facilities and whose roles are within the engineering, designing, planning, consulting, project managing, and/or constructing of these projects.” Think this is an ETF that might benefit from increased infrastructure spending? Yes, it probably is. Now nearly three years old, FLM has done a decent job of attracting assets with $60.3 million in assets under management, but an expense ratio of 0.7% might be a stumbling block to this 72-stock ETF. Investors will find some familiar names among FLM's top-10 holdings, none of which receives a weight largest than 2.78%, proving the fund is at least diverse. Flour

, Jacobs Engineering

, KBR

and McDermott International

are among the FLM holdings investors may recognize. Still, the expectations for increased infrastructure spending haven't translated into success for FLM as the ETF is just flat on the year compared to a gain of over 6% for the S&P 500. That performance also lags the returns of some country-specific infrastructure plays That may be more a result of FLM being left behind not because it's a weak ETF, but because many investors haven't woken up to the FLM story. If the global infrastructure theme is truly embraced in the back half of this year and into 2012, FLM should right the course and transform from unknown laggard to legitimate hidden gem.