On Nov. 15, President Biden signed the $1 trillion bipartisan infrastructure bill into law. This bill will send a deluge of funds into the economy.
Some ETFs have seen returns boosted in anticipation of this government spending, while others could benefit from the long-term nature of this bill, as it provides support for these areas for years to come.
The bill will distribute the $1 trillion over 10 years, with the federal government sending funds directly to states for projects that fit the bill’s criteria. That produces several different phases of spending, which affects when certain sectors will get their piece of spending.
Arthur Dong, a professor of economics who teaches infrastructure financing at Georgetown University, says states will focus on “must-do” tasks first, like repairing infrastructure at risk of failure or taking on long-deferred projects.
He expects engineering firms to see the first boon from the bill, as more public works projects will be put up for bid, while materials producers and industrial machinery makers will fill up their order books in anticipation of the start of construction over the next three to four years.
“These are long and drawn-out processes,” Dong said. “You can't build a toll road or a bridge overnight.”
The final version of the infrastructure bill provides $110 billion to repair aging highways, bridges and roads in the U.S. The $40 billion specifically set aside for bridges is the largest dedicated bridge investment since the construction of the National Highway System.
Not All Industrials Alike
Industrials sector ETFs are an obvious way to play the bill. However, investors should be cautious about what’s inside their industrial ETF, as GICS’ definition for the sector includes commercial services like short-term employment offices and couriers.
The Industrial Select Sector SPDR Fund (XLI) has a 4.82% weighting toward UPS and a nearly 20% allocation to freight and logistics, while the Fidelity MSCI Industrials Index ETF (FIDU) has a 3.6% weighting to UPS and a 16.3% allocation to the freight subsector.
One ETF that offers a more focused take on this idea is the Global X U.S. Infrastructure Development ETF (PAVE). The fund’s performance this year has waxed and waned with the congressional back-and-forth on the details of the spending bill.
Year-to-date, the ETF has gained 36.5%. Relative to some other infrastructure ETFs like the iShares U.S. Infrastructure ETF (IFRA), PAVE has a focus on “hard” infrastructure like roads, bridges and transport.
The First Trust RBA American Industrial Renaissance ETF (AIRR) is another ETF that offers focused exposure to likely beneficiaries of this spending. More than 70% of the portfolio is allocated to companies in the construction and machinery subsectors. This makes it one of the purest ETF plays for the initial surge of spending from this bill.
Courtesy of FactSet
(For a larger view, click on the image above)
Wave Of Spending For Water
Similarly, U.S.-focused water ETFs are likely to see support going forward. Both the Invesco Water Resources ETF (PHO) and the First Trust Water ETF (FIW) could be beneficiaries of the $55 billion that is set to be spent on water and wastewater infrastructure.
Relative to PHO, FIW tilts toward smaller-cap names due to its equal-weighting methodology. This tilt has allowed it to slightly outperform year-to-date as well as over the longer term.
Similar to PAVE, these ETFs are expected to see near-term support, as water infrastructure has come into focus over the past several years. Growing climate risk has put a strain on the aging water infrastructure, and lead service lines—banned in 1986—are still present across much of the country and remain a safety risk to many.
Upgrading Broadband Infrastructure
There’s also an opportunity for certain sectors that could generate additional revenue through tapping previously unserved or underserved markets. Approximately $65 billion in spending is allocated to broadband infrastructure, with a focus on connecting rural and lower-income areas.
An estimated 30 million Americans lack access to reliable internet access, which became a particular pinch point during the pandemic as schooling and several industries went fully remote.
Funds like the Global X Data Center REITs and Digital Infrastructure ETF (VPN) and the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR) stand to benefit during the construction of physical assets linked to the guts of the internet, and will have new long-term customers from telecom providers or municipalities that decide to build their own internet service as an in-house utility.
Dong also expects commercial REITs to reap some benefit from the bill’s emphasis on electric vehicle adoption, since charging stations will need access to a range of real estate to keep drivers from running out of power.
“You’re going to see a lot of real estate gain as a result of that, because they'll be collecting rents from Tesla, as well as all these charging companies,” he said.