The U.S. Is About to Spend Hundreds of Billions on Infrastructure: 3 ETFs to Reap the Benefits
Billy Duberstein, The Motley Fool
6 min read
Although the bipartisan Infrastructure Investment and Jobs Act (IIJA) was passed in late 2021, it takes a long time for all those projects to get proposed, approved, and funded, and for shovels to get into the ground.
Some investors might think the money has already been spent, or that higher interest rates might limit the construction industry this year. But as of last November, 80% of the $1.2 trillion had yet to be allocated. That leaves lots of spending coming down the pike for these projects -- and the companies that will make them happen.
As those dollars come through and are allocated across the country, look for these three exchange-traded funds (ETFs) levered to industrial, materials, and electrification stocks to benefit.
Invesco Building & Construction ETF
According to U.S. News & World Report, the highest-returning ETF related to infrastructure over the past year has been the Invesco Building & Construction ETF(NYSEMKT: PKB), up nearly 52%.
The index is fairly concentrated among just 30 stocks, which may account for its outperformance versus more diversified funds. But across those 30 stocks there's a bit of variety, spanning materials, industrial, and homebuilder stocks, along with a dash of utilities.
What's interesting about this fund is that it contains a bunch of companies that do engage in broader infrastructure projects -- such as bridges, tunnels, dams, roads, power lines, and others contained in the infrastructure bill. For instance, the largest position in the fund (at a 5.3% allocation) is Martin Marietta Materials(NYSE: MLM), a leader in aggregates, asphalt, concrete, and other materials and chemicals involved in large construction projects. Another large holding is its competitor Vulcan Materials(NYSE: VMC), which makes similar building products.
Interestingly, the ETF not only contains these construction materials companies, but also counts as top holdings virtually all the major homebuilder stocks, along with construction retail giant Home Depot(NYSE: HD).
While these stocks are more consumer-oriented and not necessarily related to public infrastructure, the setup for major homebuilders is favorable right now. Existing homeowners with locked-in 30-year mortgages are reluctant to move, and the U.S. has underbuilt housing since the financial crisis of 2008. That has put builders of new homes in a great selling position, in spite of higher interest rates, and that subsector has rallied over the past year.
Investors will wind up paying a bit more for this concentration and for the past year's outperformance. The ETF's expense ratio is 0.62%, which is a tad higher than you might find in a typical ETF, and much higher than a diversified market-tracking index fund.
Image source: Getty Images.
iShares U.S. Basic Materials ETF
Slightly more diversified and with more large-cap international industrials, the iShares U.S. Basic Materials ETF(NYSEMKT: IYM) may be a good choice. The expense ratio is a bit lower than that of the Invesco Building & Construction ETF, but you also get larger, diversified companies across 39 holdings.
This ETF tends to invest in diversified companies which all play a part in the U.S. infrastructure buildout, but perhaps aren't quite as dependent on that buildout alone. The top five holdings span industrial gas giants Linde(NASDAQ: LIN) and Air Products and Chemicals(NYSE: APD), mining giant Freeport-McMoRan(NYSE: FCX), water treatment heavyweight Ecolab(NYSE: ECL), and steel giant Nucor(NYSE: NUE).
Linde and Air Products could very well benefit from the reshoring of manufacturing, as well as unique IIJA-funded projects such as the seven regional hydrogen hubs announced last October. Meanwhile, the ongoing electrification of the power grid and new EV battery plants will require huge amounts of copper, which is where Freeport-McMoRan gets most of its revenue. And of course, infrastructure projects and EVs alike will need innovative steel products made by Nucor and its steelmaking peers, which are also included further down in the ETF.
The ETF is up 13.5% over the past year, and its large-cap focus gives investors a decent and growing dividend yield of nearly 1.7%.
One risk to keep in mind: While the index is fairly diversified across 39 stocks, its top holding Linde accounts for a whopping 20.5% of the fund. Should Linde fall on hard times or have a company-specific problem, this ETF will likely have near-term downside.
First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund
Much of the infrastructure bill's spending targets infrastructure projects with an eye toward environmental sustainability and electrification. As the ticker of the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund(NASDAQ: GRID) hints, that means electrifying the country's power grid. That will include new renewable-power technologies, along with building the new transmission lines to get that energy where it's needed.
The First Trust Clean Edge Smart Grid Infrastructure fund is composed of top-notch industrial companies. Its top two holdings Eaton Corporation(NYSE: ETN) and ABB Ltd.(OTC: ABBN.Y) make all sorts of electrical components, wiring, housing, switchgear, and other equipment used by utilities in the generation and distribution of power. That gives a flavor of the rest of its holdings, which are mainly large-cap industrials across the globe involved in the production and distribution of electricity, or the components that make that happen. Aside from the focus on utilities, there are also single-digit allocations to semiconductors, consumer renewable-energy equipment, and electric-vehicle parts.
The ETF has a 0.57% expense ratio, but it's performed pretty well, up 18.8% over the 12 months ending March 28. And with a diversified 102 holdings, it's a great way to expose your portfolio to broader electrification trends.
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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Abb, Home Depot, and Linde. The Motley Fool recommends Ecolab. The Motley Fool has a disclosure policy.
