As President Joe Biden’s infrastructure bill progresses through Congress, investors may be wise to consider investing in infrastructure. The bill would invest more than $2 trillion to improve the nation’s infrastructure — such as roads, railways and bridges — and the use of green energy over the next eight years.
Such a financial influx could give companies that own or operate infrastructure, or the elements that go into building and maintaining it, a generous revenue boost. And when revenue rises, share price and dividend payments generally do, too. But how should investors approach this sector of the market?
We spoke with Scott Helfstein, executive director of Thematic Investing at ProShares, which runs the ProShares DJ Brookfield Global Infrastructure ETF (ticker: TOLZ), about the merits of investing in infrastructure and what to look for when you do. Here are edited excerpts from that interview.
Why should investors be looking to infrastructure investments right now? And why exchange-traded funds in particular?
There are three reasons investors might want to consider infrastructure investment.
First, there is policy tailwind coming from the District of Columbia and Biden’s proposed infrastructure plan. With an initial sticker price above $2.2 trillion, the plan goes beyond roads and bridges and takes a very broad view of infrastructure, including elements like communications networks and drinking water.
Second, economic reopening should help existing infrastructure assets, many of which may have been underutilized during pandemic-driven shutdowns. Reopening should improve demand.
The third reason is tied to the low-interest-rate and potentially inflationary environment. Owners and operators of infrastructure assets have historically offered reasonable yield, which investors may be looking for with 10-year U.S. Treasurys still yielding less than 2%.
The challenge of low rates becomes even more acute if inflation begins increasing. Infrastructure owners have real assets, which are often viewed as a way to navigate higher inflation. ETFs can be a good way to access the sector by providing investors a diversified basket of infrastructure assets rather than trying to pick one or two winning companies.
What are the benefits and risks to investing in infrastructure?
The high-level rationale behind infrastructure investment is rooted in demographics and the need to service a globally growing population. There is a growing need to supply clean drinking water, move people around crowded urban spaces, provide reliable energy transmission and increase communication bandwidth.
Not surprisingly, much of global spending is taking place in Asian countries like China, India and Indonesia. Investors may want to take a global view of infrastructure, given where both demographic growth and spending have been strongest.
On top of the demographic-driven demand, the World Economic Forum has estimated that governments are chronically underspending on infrastructure, with the spending gap between what is needed and what is spent growing to $15 trillion by 2040.
The spending gap also highlights an important risk: continued underfunding by governments around the world. Biden is attempting to address some of the shortfall in the U.S., but his plan is just a proposal. What Congress actually passes could be larger or smaller, so there is some policy risk to investing in infrastructure. That is risk more relevant to cyclical infrastructure companies such as construction. As a group, owners and operators of infrastructure assets tend to be less vulnerable to this and have historically offered investors a stable and attractive yield.
What should investors look for in an infrastructure ETF?
I tend to think about infrastructure investing in two buckets. The first is infrastructure owners and operators, or the companies that own broadband access, water pipes, electricity grids and energy pipelines (called pure-play infrastructure). Owners and operators tend to have long-dated contracts that help provide a degree of stability, and they are largely dividend-paying companies. These types of businesses could see infrastructure resources flow their way under a broader plan or definition of infrastructure.
The second bucket is cyclical companies such as construction firms, raw material producers and heavy machinery manufacturers. Those companies could be poised to benefit from traditional infrastructure spending on roads and bridges. Cyclical infrastructure can prove to be volatile over time. Government infrastructure spending can come as part of a stimulus package after a recession, which can make these companies early stage beneficiaries in a recovery.
So investors can pick their flavor, opting for the potentially slower-growing stability of infrastructure owners or the boom-bust cycle of builders.
What are your predictions for the infrastructure sector in the next several years?
I do believe that some part of the Biden infrastructure bill will be passed by Congress. The final version might not be $2.2 trillion and include all of the bells and whistles of the initial proposal, but there will be some activity and likely funding for infrastructure. Any plan that passes will likely have spending spread over a few years rather than a one-and-done liquidity injection. The plan will also likely try to increase adoption of green technologies.
One prediction might sound a little out of left field, but the infrastructure asset class may be increasingly tied to technology. We have traditionally thought of infrastructure as a stable, maybe even low-tech sector. That could be changing as demand for renewables and increasingly efficient systems become a larger consideration in the energy mix. Infrastructure firms will likely add capacity across the renewable complex of wind, solar, geothermal and hydrogen, while also investing in technologies like microgrids and batteries.
To put that in perspective, if just 10% of the U.S. auto fleet went electric, with the current battery technology, charging those cars 200 times per year would increase energy demand by 55 times. Needless to say, energy infrastructure companies will have to produce more energy and do so increasingly efficiently. The stage is set for an innovation wave to take hold in the sector.
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Q&A: Why Investors Should Look to Infrastructure Investments originally appeared on usnews.com