Infrastructure investments, such as exchange traded funds like the Global X U.S. Infrastructure Development ETF (Cboe: PAVE), are believed to benefit from increased government spending. That thesis may finally be coming to fruition.
PAVE tries to reflect the performance of the Indxx U.S. Infrastructure Development Index, which is comprised of companies focused on domestic infrastructure development, including those involved in construction and engineering; production of infrastructure raw materials, composites and products; industrial transportation; and producers/distributors of heavy construction equipment.
“While funding limitations have historically weighed on demand, the outlook should improve,” said Morningstar in a note out Friday. “First, midterm election results should ultimately boost funding at the national, state, and local levels. Until then, the FAST Act will continue to provide near-term funding support, as the Highway Trust Fund has enough funding to cover large outlays through 2021.”
Infrastructure And Politics
While he was campaigning, President Donald Trump’s pledge to spend $1 trillion shoring up U.S. infrastructure needs was seen as a potential catalyst for the related exchange traded funds. Still, it could take some time for infrastructure ETFs to see the full benefit of Trump’s still nascent infrastructure plans.
“Even though infrastructure demand has been strong for decades, construction activity has remained below even maintenance levels,” said Morningstar. “This has led to system degradation over the years. Although this reality is acknowledged by Republicans and Democrats alike, limited funding continues to be a problem.”
PAVE is up more than 8% year-to-date. The $116.67 million ETF, which is nearly three years old, holds 93 stocks and over 93% of those holdings hail from the industrial and materials sectors. Infrastructure needs remain dire and obvious, but this is one issue the split Congress could come together on.
“We view mixed control of Congress as a positive for infrastructure. Increased infrastructure funding is a relatively easier issue for which to find bipartisan support than legislation regarding other issues like healthcare or immigration reform. In fact, following the results of the midterm elections, leaders of all three bodies–President Donald Trump, House Speaker Nancy Pelosi, and Senate Majority Leader Mitch McConnell–discussed infrastructure positively,” according to Morningstar.
Investors added $109.22 million to PAVE last year.
For more information on the infrastructure sector, visit our infrastructure category.