Digging Into Infrastructure Funds: Did We Get It All Wrong The First Time?

Digging Into Infrastructure Funds: Did We Get It All Wrong The First Time?
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Global X’s new Infrastructure Development ETF (PAVE) picks up where others leave off

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About a month ago, just after a spate of news that infrastructure ETFs and mutual funds were not benefitting from the Trump rally, the President reaffirmed his vow to rebuild the nation’s bridges and roads. Almost immediately after, funds rushed back in. The money went primarily to three key funds: The Lazard Global Infrastructure Portfolio (GFILX), the iShares Global Infrastructure ETF (IGF), and the FlexShares Global Infrastructure Fund (NFRA). The funds are big. The rally made them bigger. But their commonalities go deeper than just size – consider even just their names. There’s one repeating word between the three: “Global.”

Infrastructure Funds

So when the funds saw lackluster post-election performance, despite catching inflows, and then saw some of those flows exit, it shouldn’t have come as a big surprise. The supposed infrastructure rally from Trump was never meant to be a global play – his “America First” slogan may have been a giveaway. After the State of the Union, with the reaffirmed call for infrastructure investment, assets flowed back into the same funds. Of course, a global infrastructure fund will include US companies – the US is part of “global” after all – but the initial assumptions here were off, perhaps it begs for a little more thought.

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Consider what an infrastructure bill may include, or where any of the funds for infrastructure may go. We know Trump wants an infrastructure bill, and there’s a large degree of bi-partisan support for that initiative. We know that there are infrastructure funds, albeit global. But, as we also know, sometimes official titles can mislead.

By some estimates, repairing the roads, bridges, dams and all other manner of large, generally public structures is going to foot a bill of nearly $10 trillion. We don’t yet have the specifics of Trump’s infrastructure proposal, but he’s certainly not been shy of highlighting that he wants to rebuild roads, bridges, airports, dams, etc. These building and rebuilding projects are certainly going to be building infrastructure, but do those infrastructure funds hold those companies that will benefit? Perhaps not. Consider the types of holdings in IGF, NFRA and GFILX. These tend to be funds that are holding pre-built infrastructure companies – those involved in a toll-road type model of companies. But a stimulus plan to build bridges doesn’t directly impact a pipeline or a highway operator – and this may be the point that investors pouring money into those funds missed.

So if all of these products are wrong, where should investors be looking? If the idea is to trade on Trump, consider focusing more on US companies, these are the ones most likely to benefit under this President, after all. In terms of what these companies may be involved in? Well, those that build things are probably a good place to start. It would seem natural that companies involved in the process of building things are more likely to win eventual bids to build things.

It may not be that simple, though. A new fund that just launched, the Global X U.S. Infrastructure Development ETF (PAVE) holds a few others, as well. Like the other three funds, it does have “Infrastructure” in the title as well as, we guess, “Global” (technically), but it’s also very clearly focused on the U.S., and development. PAVE holds companies involved in the extraction, refinement, and transportation of raw materials, as well as producers of heavy equipment.

If you’re looking directly for a Trump Infrastructure play, this is probably a more accurate way to do it. Global X urges, though, that this isn’t just a Trump trade. In fact, even if a stimulus bill doesn’t pass, half of the $10 trillion needed to rebuild roads and bridges is already allocated. Consider that cities are now also taking steps to be more independent in their approaches to infrastructure repair – with New York and Los Angeles aiming to fix their public transit systems. A lack of a federal stimulus package in the immediate short term, or possibly in the long term, doesn’t detract from the very real renewed focus on infrastructure that’s being seen across the nation.

PAVE is new, having launched on March 8th, but it’s up to nearly $4 million in assets in a very short time – a respectable pace for such a new fund. To our minds, this is something to keep an eye on.

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