Infrastructure ETFs to play the INVEST in America Act

Last Thursday, the United States House of Representatives approved a $715 billion INVEST in America Act. The bill will encourage investment in infrastructure such as roads, bridges, railways and water. This comes as an even larger bipartisan act is still being negotiated. This is not pocket money, even by post-Covid standards, and investors have several options available to get exposure to the sector.

It’s raining money in USA

The INVEST in America Act dedicates $343 billion for roads, bridges and safety measures, $117 billion for drinking water infrastructure resources, $51 billion for wastewater infrastructure, $109 billion for transit as well as $95 billion for passenger and freight rail[1].

At the same time, President Biden is trying to reach an agreement for an even larger packet. The task is never easy, and the President almost ruined the deal after making a controversial statement. He suggested that the bill would be pegged to another act focused on social spending and tax increases, turning down Republicans’ support. After withdrawing his condition, the White House and Congress seemed to make progress towards a final agreement, which would pour even more funds into infrastructure projects.

Now that you know the deal, let’s see how you can play this event using ETFs.

As usual, there is an ETF for that

You know the saying: if it exists there is an ETF for it. Well, this is true for infrastructure too.

Investors around the world have a vast range of product to choose from. We can distinguish between broad infrastructure ETFs, which invest in a vast array of infrastructure projects, and sector or thematic infrastructure ETFs, such as energy infrastructure or smart infrastructure.

The list can then be broken down by geography, with the US infrastructure sector outperforming its global equivalents. ETFs that track US infrastructure such as PAVE and IFRA are up about 20% year-to-date while global infrastructure ETFs IGF and ZPRID trail behind, with a return of around 5% so far in 2021.

Source: Trackinsight, June 30, 2021

However, today might be a little late to join the party. Some investors have already anticipated the news and bought the relevant ETFs in the past few months, as shown in the graph above. In particular, April saw close to $900 million inflows in US infrastructure ETFs, an all-time record. Speculation now seems to be slowing down with less than $150 million inflows in June.

Some might think that this is a sign that investors were disappointed with the amount stated. Or perhaps the deal that is still under negotiation is expected to change the trend in the future.

Focused infrastructure ETFs are another way to play this trend, and some have had stellar performance so far in 2021.

Sector ETFs like energy infrastructure ETFs have been supported by a strong increase in oil price, such as the Global X MLP & Energy Infrastructure ETF (MLPX). Thematic ETFs like smart infrastructure ETFs invest in new technologies that could change the way our cities are managed. If their performance is lagging the energy infrastructure space year-to-date, this theme remains attractive for its upside potential as technology progresses. For example the iShares Smart Cities ETF (CITY) is up 13% year-to-date.

More generic sector ETFs could also benefit from the forthcoming shower of capital. Indeed, the SPDR Energy Sector ETF (XLE) and Vanguard Energy ETF (VDE) are up more than 45% year to date. But there could be a second order impact to the increase spending in infrastructures: an increase in commodities prices.

[1] https://www.congress.gov/bill/117th-congress/house-bill/3684