Market Overview

Paving The Way Toward Filling Infrastructure Gaps

Paving The Way Toward Filling Infrastructure Gaps

In a rare display of bipartisanship, President Donald Trump and congressional Democrats recently agreed on seeking $2 trillion to shore up America's crumbling infrastructure.

Infrastructure stocks and exchange traded funds, such as the Global X U.S. Infrastructure Development ETF (CBOE: PAVE), experienced modest bounces following that news, but some analysts urge investors to remember that when it comes to infrastructure, how the money is spent is arguably as important as how much there is to spend.

What Happened

During his first campaign, Trump pledged to seek $1 trillion to shore up America's airports, bridges, highways, railways and roads, many of which are in bad need of overhaul. PAVE, the only ETF dedicated to domestic infrastructure investments, debuted just after Trump was sworn in as the 45th U.S. president.

As a starting point, the White House and congressional Democrats may look to solve short-term infrastructure spending needs, but even that carries a massive price tag.

“The needs are large so a $200 billion proposal would be a good start provided it represents a net increase in investment,” according to Fitch Ratings. “Every state, regional or local transportation, water or power department or independent authority can use an infusion of funds to accelerate projects already in planning and development.”

Why It's Important

The $132.30 million PAVE, which tracks the INDXX U.S. Infrastructure Development Index, is up nearly 21 percent year-to-date. PAVE holds 94 stocks, about 93 percent of which hail from the industrial and materials sectors.

With the 2020 presidential campaign already in full swing, it's possible PAVE can extend its gains this year as politicians from both parties look to take advantage of federal infrastructure spending plans. What investors and voters hear about on the campaign trail this year and in 2020 will be infrastructure projects slated to start in 2021 or 2022.

“The ramp-up in 2021 and 2022 will need to be rapid to make a dent so multiplying that investment by 2–3 times over three years and communicating it now will allow planners to plan and construction companies to ramp up labor and resources to meet the need without materially driving up prices,” said Fitch.

What's Next

PAVE offers long-term potential as well because the amount that needs to be spent on domestic infrastructure is staggering, but the wider ranging implication for infrastructure investments is how efficiently infrastructure needs are identified coupled with efficient deployment of capital.

“Rebuilding a $20 trillion economy with a multi-trillion dollar investment gap will ultimately need an annual new investment of about $1 trillion a year for a while, i.e. 5% of GDP, to meaningfully catch-up,” said Fitch.

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