Possible Infrastructure ETF Bonanza

Key Takeaways

• CFRA believes that infrastructure spending will impact many companies, providing cross-sector thematic ETFs with an opportunity to shine.
• We think U.S. firms such as Jacobs Engineering (J) and Quanta Services (PWR) are well-positioned to experience strong demand in the years ahead.
• The two largest infrastructure ETFs, the iShares Global Infrastructure ETF (IGF) and the Global X U.S. Infrastructure Development ETF (PAVE), are constructed differently, which is why they have distinct three-year performance records.

Fundamental Context

Government spending on infrastructure will be broad-based. The need for federal infrastructure spending to improve aging U.S. infrastructure is stronger than ever, as President Biden’s latest proposal emphasizes clean energy, reducing carbon emissions and electrical grid modernization, explains CFRA Equity Analyst Elizabeth Vermillion.

Within the construction and engineering subindustry, CFRA expects surging demand from the focus on the electrical grid. Companies within the subindustry such as J and PWR are strong players in electrical projects, including 5G network buildout. Additional federal spending would be a large boost on an already-booming market.

Vermillion also thinks machinery companies such as Caterpillar (CAT), Cummins (CMI) and Deere & Company (DE) that already invest in and are working on battery-electrification and reduced carbon emissions will see demand spikes.

Meanwhile, CFRA Equity Analyst Matthew Miller thinks construction materials companies, such as Vulcan Materials (VMC), would also be a direct beneficiary of higher transportation spending from the federal government if the Democrats are successful in passing Biden’s $2 trillion infrastructure package.

Under The Hood

What is inside infrastructure ETFs can be quite different. IGF is the largest infrastructure themed ETF, with $3.0 billion in assets. But as the ETF’s name suggests, this is a global strategy with just 34% of assets in U.S. companies and double-digit exposure to Canada and Australia, with smaller stakes in China, Italy and Spain.

In contrast, $2.2 billion PAVE holds only U.S.-listed companies such as DE. A third popular ETF, with $2.5 billion in assets, the FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA), has 40% of assets in U.S. companies, while Canadian- and Japan-based companies represent 10% or more of NFRA’s assets.

Country Exposure for Infrastructure ETFs (% of assets)

Infrastructure spending impacts more than industrials and materials stocks. While industrials such as DE, J and PWR comprise 65% of PAVE’s assets, the sector represents a smaller portion of the portfolio for its ETF peers. Utilities—such as Duke Energy (DUK) and NextEra Energy (NEE)—are 41% of IGF’s assets, more than the ETF’s 39% stake in industrials.

In contrast, NFRA has 30% of assets in communications services, including positions such as AT&T (T) and Comcast (CMCS.A), driving the sector’s higher weighting than the ETF’s 24% stake in Industrials. The Biden infrastructure proposal includes spending to upgrade broadband capabilities across the U.S. that would be a boost for some communications companies. 

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Sector Exposure for Infrastructure ETFs (% of assets)

Fees are not the driver of past or future ETF performance. IGF is the cheapest of the trio, charging a 0.46% expense ratio that is 1 basis point less than the fee charged by NFRA and PAVE. Yet IGF’s three-year total return of 4.9% (as of March 31, 2021) was nearly doubled by NFRA (9.5%) and more than tripled by PAVE (17%).

However, CFRA does not rely solely on past performance when assessing the prospects of an ETF. We combine the fund’s costs as well as the risk/reward attributes of its holdings. PAVE earns a CFRA five-star, but IGF and NFRA are three-star funds worthy of consideration.

We focused on the three largest ETFs in this cross-sector theme, but others include the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID), the iShares U.S. Infrastructure ETF (IFRA) and the ProShares DJ Brookfield Global Infrastructure ETF (TOLZ).

Performance Record for Infrastructure ETFs (%)

Charts Source: CFRA’s First Bridge ETF Database, as of March 31, 2021

Conclusion

The Biden administration and the Democratic-controlled Congress are likely to move forward with infrastructure spending impacting many sectors of the global stock market. While we expect demand for cross-sector thematic ETFs to pick up, we believe investors need to understand what makes some of the more popular funds unique.

CFRA will be discussing infrastructure ETFs during its upcoming webinar, “Key ETF Themes for the New Normal Economy” on April 8 at 11 a.m. ET. Find out more: https://go.cfraresearch.com/new_normal_economy

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