Batteries Enter Infrastructure ETF Plays

June 29, 2021

With bipartisan support of a new $579 billion infrastructure spending bill, investors naturally are turning their attention to ETFs that focus on the space for opportunity.

But as per “ETF usual,” despite the similar sounding names, the 12 infrastructure ETFs are differently constructed, with different goals. Some ETFs are better positioned to take advantage of the proposed policy’s focus on “hard” infrastructure.

The bill’s projected funding for electric vehicle infrastructure could benefit lithium battery ETFs as well, which typically fall outside the definition of “government-funded infrastructure.”

New US Infrastructure Start

The plan still needs to go through Congress with costs and line spending to be worked out, but the bipartisan support bodes well for the plan and could build a foundation for U.S. infrastructure ETFs to perform well.

One such ETF is the Global X U.S. Infrastructure Development ETF (PAVE), the biggest ETF in the space, with $3.67 billion in assets under management. This fund tracks a market-cap-weighted index of U.S.-listed companies that receive most of their revenue from, or have a stated business purpose related to, infrastructure development.

The holdings within the portfolio include many players in the construction supply chain, such as producers of raw materials, construction equipment producers, industrial transportation and engineering services.

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Another ETF that plays in this space is the iShares U.S. Infrastructure ETF (IFRA), the fourth largest infrastructure ETF, with $591 million in assets.

IFRA splits its portfolio into two sections. One half of the portfolio is invested in infrastructure enablers, such as construction companies and engineering services. The other half is in infrastructure asset owners and operators, which includes things like utilities or energy transportation and storage.

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Digging Into The Differences

As mentioned above, the funds have different ways of defining the infrastructure space.

The asset size difference shows up in the average spread, which can be found using our ETF Comparison Tool. PAVE’s toll is more expensive at 0.47% relative to IFRA’s 0.40%, but factoring in the lower trading spread for PAVE evens things out between the two funds.

 

 

PAVE Steamrolling IFRA Performance

The two funds have performed in line with one another until recently, when PAVE started bulldozing IFRA’s returns.

PAVE is up 75.9% over the trailing year compared to 59.2% for IFRA.

 

 

This outperformance makes sense when looked at through the context of how each fund defines infrastructure.

By focusing on the construction supply chain, 63% of PAVE’s portfolio is in the industrials sector, with another 24% in materials. Both sectors have been the beneficiary of the reopening trade that has defined markets over the past year.

IFRA’s decision to allot half of the portfolio to include asset owners and operators means nearly 44% of the portfolio is in the utilities sector, which has not fared as well over the past year. Utilities is a defensive sector and tend to do poorly during periods when bond yields are rising, making these stocks look less attractive.

The plan’s focus on “hard” infrastructure—roads, bridges and transport—could set PAVE up for further outperformance.

Electric Vehicle Infrastructure Real

A notable line item in the proposed plan is the $15 billion in funding for electric vehicle infrastructure and electric transit.

This federal support for electric transportation comes at the same time many automakers are building out their efforts in the electric vehicle space. Though electric vehicles have been perceived as being for the “green” crowd, Ford’s F-150 Lightning—an electric version of the automaker’s F-150—received nearly 45,000 pre-orders in less than 48 hours.

Growing federal support and consumer interest in electric vehicles could charge up ETFs such as the Global X Lithium & Battery Tech ETF (LIT). This fund tracks a market-cap-weighted index of global lithium miners and battery producers, an essential component in electric vehicle production.

Another ETF that might benefit is the Amplify Lithium & Battery Technology ETF (BATT). This ETF tracks a market-cap-weighted index that invests in global advanced battery material companies such as those that mine or produce lithium, cobalt, nickel, manganese and graphite.

These funds have been supercharged over the past year. LIT has gained 131.8%, while BATT is up 100.3%. However, there are signs that EV-related ETFs such as these could have even more room to run.

 

Courtesy of StockCharts.com

 

According to Pew Research Center, 7% of U.S. adults said they currently have an electric or hybrid vehicle. However, 39% said they were very or somewhat likely to seriously consider buying one the next time they were in the market for a new vehicle.

The proposed package still needs to weave its way through Congress, where negotiations will likely change the details of the package. But with bipartisan support for hard infrastructure, including electric transportation, the outlook for passage is optimistic.

For a list of ETFs that offer exposure to domestic and global infrastructure, check out our Infrastructure ETFs channel.

Contact Jessica Ferringer at [email protected]

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