[This ETF Industry Perspective is sponsored by Global X.]
On March 8, 2017, we launched the Global X U.S. Infrastructure Development ETF (PAVE), which invests in companies that potentially stand to benefit from an increase in infrastructure projects in the United States. Such an increase could be driven by the introduction of fiscal spending bills or tax incentives to stimulate the undertaking of new projects, increases in private investment given additional profitable opportunities, or streamlined regulations that fast-track the approval process for infrastructure projects.
Unlike many existing infrastructure funds, which tend to primarily invest in utility and energy companies, PAVE invests in: 1) companies involved in the construction and engineering of infrastructure projects; 2) the production of raw materials, composites and products used in building infrastructure projects; 3) producers and distributors of heavy construction equipment; and 4) companies engaged in the transportation of materials use in infrastructure projects.
In this piece, we will answer four key questions:
- How important is infrastructure to economic growth?
- What is the current state of the U.S.’ infrastructure?
- What are some potential approaches to stimulate infrastructure development?
- How does PAVE approach infrastructure investing?
How Important Is Infrastructure to Economic Growth?
Infrastructure includes highways, streets, rail, transit, airports, seaports, waterways, waste management, power grids, communications equipment and pipelines. Infrastructure is the backbone to any economy, as it facilitates the movement of goods and labor, which allows for greater competition, higher productivity and reduced costs. Therefore, many economists believe that increases in public or private spending on infrastructure development can significantly boost economic growth. According to research from S&P, a 1% increase in U.S. infrastructure spending as a percentage of GDP translates to a 1.7% increase in GDP over the next three years, or a 70% return on investment.i
What Is the Current State of the U.S.’ Infrastructure?
The U.S.’ infrastructure, which was largely built in the post-World War II period, is rapidly aging, while suffering from a shortage of funding required to maintain these assets. While spending on infrastructure construction has nominally increased at an annualized rate of 3.6% over the last 15 years, it has actually decreased at an annualized rate of -0.2% once controlling for inflation and real GDP growth. These numbers tell an even more troubling story when broken into various segments of infrastructure. In the chart below, note that the Power segment, which includes electric power generation and distribution, and the storage and transportation of oil and natural gas, is the only category demonstrating real construction spending growth relative to GDP.
Source: U.S. Census Bureau. Based on 2016 Construction Spending Survey.