Infrastructure ETFs: Where the Money Goes

July 16th at 3:00pm by Tom Lydon

Infrastructure ETFsGlobal infrastructure exchange traded funds (ETFs) could be directly fueled by government stimulus programs. For the United States, the question behind the infrastructure plan is how to use the money provided judiciously.

The American Recovery and Reinvestment Act of 2009 provides $111 billion for infrastructure and science projects, report Kevin L. Kliesen and Douglas C. Smith for St. Louis Fed. States are scrambling to get a piece of a slated $27.5 billion set aside for spending on highway construction alone.

The United States’ 2009 report Card for America’s Infrastructure is a cumulative D. The ASCE says the U.S. needs $1.1 trillion in spending over the next five years to bring infrastructure up to “good condition.” The Congressional Budget Office calculated that spending on the U.S. transportation infrastructure was about $16 billion below spending needed to maintain service levels.

Macroeconomic determinants of infrastructure spending include:

  • Growth of per capita income and technical change. As a country gets wealthier, the spending habits change along with the necessary infrastructure needed to facilitate that change.
  • Population growth. More people means more public schools, hospitals, fire stations and other basic infrastructures.
  • Higher costs. Increase in commodity prices also increases costs to construction, which means less infrastructure projects.

Microeconomics factors at the state and local levels include political considerations, engineering assessments and local economic performance. Other determinants include:

  • Budgets. Local governments have to stick to a balanced budget, which limits funding to projects based on revenue.
  • Net Benefits. Projects are deemed economical if the benefits exceed costs.
  • Rate of return. Projects are also economically feasible if real rate of return exceeds estimated real interest rate earned on revenue invested elsewhere.

Infrastructure trends will vary across the board. The two largest categories are in education facilities and highways while industrial structures, health care structures and military structures are all dropping in priority. The government will also have to take into consideration the changing dynamics of technology and the way it influences infrastructure. For example, e-commerce reduces the need for traditional infrastructure and energy infrastructure will begin shift as society embraces alternative fuels.

  • iShares S&P Global Infrastructure (IGF): down 0.1% year-to-date

ETF IGF

  • SPDR FTSE/Macquarie Global Infrastructure 100 (GII): down 6.1% year-to-date

ETF GII

For more information on infrastructure, visit our infrastructure category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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