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What the ultimate outcome is remains to be seen – politics are involved after all – but as expected, the Biden Administration proposed a whopper of an infrastructure package.
The American Jobs Plan and the Made in America Tax Plan were introduced last week. The latter is aims to pay for the former and, if passed, amounts to the first substantial tax increase in this country in three decades. In an effort to keep this space relatively free of political commentary, the focus will be on the infrastructure because it carries wide-ranging investment implications and is generating enough buzz that advisors ought to be prepared to discuss related ideas with clients.
As expected, the American Jobs Plan includes plenty of CleanTech, clean energy, and related infrastructure spending – more than $300 billion. If the Biden Administration has its way, that number will be more floor than ceiling, perhaps providing a boost to clients allocated to clean energy fare.
On the more meat-and-potatoes side of the ledger is proposed spending of $621 billion on transportation infrastructure, such as bridges, railways, roads and the like. Again, that number is on the low end of the trillions that need to be spent on those projects in the U.S., but it's a decent starting point.
Getting it Right This Time
Politicians are often adept at finding ways of surviving broken promises, which is to say it's not surprising that there hasn't been a large-scale infrastructure package passed in this country since the Eisenhower Administration.
Of course, advisors don't have the luxury of “getting it wrong.” At least not on a regular basis. Under any circumstances, this is important, but with regards to infrastructure investing, it's actually easy to get it wrong. The favored way of tapping into infrastructure spending is via funds – be they actively managed mutual funds or passive index and exchange traded funds. Problem is many of these strategies are surprisingly global in nature.
The Global X U.S. Infrastructure Development ETF (CBOE:PAVE) is the original ETF dedicated to domestic infrastructure spending. PAVE “seeks to invest in companies that stand to benefit from a potential increase in infrastructure activity in the United States, including those involved in the production of raw materials, heavy equipment, engineering, and construction,” according to Global X.
PAVE is just five years old, young relative to the legacy funds in the category. Yet, it already has $2.53 billion in assets under management, making it the second-largest infrastructure ETF. That's confirmation asset allocators long craved a US-focused infrastructure strategy.
Platitudes aside, the PAVE methodology is appropriate and relevant – pending the outcome of the American Jobs Plan.
“Every year, traffic congestion costs our economy over $160B, motorists spend over $1,000 on lost fuel, and traffic accidents result in over 35,000 deaths (4x that of Europe per capita),” according to Global X research. “By investing in physical infrastructure like roads, bridges, ports, and airports, the U.S. can limit economic loss by mitigating inefficiencies. Further, enhancements to public transit like offering new options, upgrading existing ones, and increasing their range can improve overall productivity by facilitating commerce and improving economic participation.”
Power of PAVE
Another point advisors can bring up with clients regarding PAVE is that while infrastructure investing isn't “sexy” per se, the Global X fund offers a fresh approach.
Old guard products in this category are often utilities/energy funds in disguise. For example, the S&P Global Infrastructure Index allocates almost 61% of its combined weight to those sectors. That exposes clients to at least two risks – paying up for the defensive posture and high dividends found with utilities and oil price volatility via energy exposure.
Conversely, PAVE devotes almost 87% of its weight to the industrial and materials sectors, levering the fund to the cyclical/value rally that's getting so much deserved attention these days.
Those sector exposures are important because of the expected beneficiaries of the infrastructure largess, including “materials like asphalt, construction aggregates, concrete, steel, and copper. Construction products and equipment will be essential in building physical infrastructure, while construction and engineering service companies will likely be those putting said materials and equipment to use,” according to Global X.
Politicians proposed an infrastructure plan for the 21st century. If they can get it right, advisors can do the same with a strategy designed for this moment, not one that banks on utilities stocks.
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