- Plans in Washington call for increased federal spending on transportation, water, broadband infrastructure, and maybe more.
- Companies that build or operate infrastructure may benefit from those plans.
- Infrastructure spending may create opportunities for investors in US and international stocks, municipal bonds, and real estate investment trusts (REITs).
- The number of mutual funds and ETFs that offer exposure to infrastructure has increased in recent years. See below for investment ideas.
Even in our politically polarized times, investing in infrastructure is one thing that many citizens and politicians agree on. So far this year, the White House and Congressional Republicans have both put forth plans for new spending. And while their proposals differ significantly in size, timing, and even what "infrastructure" entails, both call for spending billions of dollars on the nation's roads, ports, airports, broadband internet, and water systems. The White House proposal also adds a variety of health and welfare spending programs.
How infrastructure spending can create investing opportunities
Increased government spending on infrastructure can benefit investors in companies that contract with governments to build and operate that infrastructure. Generally, investment in infrastructure operators has offered predictable returns thanks to the long-term contracts most of these companies hold with the governments who own the facilities they manage. Investment in construction companies that build infrastructure, whose earnings may rise and fall depending on economic and political shifts is more likely to expose investors to higher volatility, but also to potentially greater returns. In addition, companies whose products range from gravel and concrete to construction machinery and software may also all benefit from increased construction spending.
Pranay Kirpalani manages Fidelity® Infrastructure Fund (FNSTX) and invests in companies that operate infrastructure. He's optimistic about infrastructure investments and sees opportunity in trends tied to the long-term growth of the internet, e-commerce, 5G networks, cloud computing and electricity. That optimism appears well-founded as the infrastructure spending plans that have emerged from Washington call for increased funding to expand digital infrastructure.
Kirpalani's experience over the past year may also offer some guidance for self-directed investors who may want to add exposure to infrastructure.
He says that in 2020, investments in companies that operate internet infrastructure such as communications towers--and underweight positions in operators of rail networks, airports, and toll roads--helped his fund's relative performance. While 2020 was an unusual and extreme year in many ways, the response by people and organizations to the COVID pandemic demonstrated how the internet can permanently reduce the need for commuting and business travel. The relative ease with which many activities of daily life moved online raises the question of how much road, transit, and airport capacity may truly be needed in the future. This question has long-term implications for infrastructure builders and operators beyond the short-term enthusiasm for increased government "infrastructure" spending.
Like Kirpalani, Steve Buller, manager of Fidelity® Real Estate Investment ETF (FPRO) also sees opportunity in internet infrastructure. He points to real estate investment trusts that own data-center and communications-tower properties as potential beneficiaries of rapid demand growth as telecommuting has gone mainstream.
Another area where increased federal infrastructure spending may create opportunities in the US is in water and sewer systems, many of which are aging or suffering from inadequate maintenance.
In April, Congress passed a bipartisan $35 billion spending bill intended to improve the nation's water systems, which are plagued by many of the issues common to old water systems worldwide. Due to poor management and old infrastructure, 30% to 40% of the global water supply is lost to leaking pipes, unauthorized use, corruption, or inefficiency according to the International Energy Agency.
Janet Glazer, manager of Fidelity® Select Industrials Portfolio (FCYIX) says government spending alone won't fix these problems, but industrial companies with expertise, technology, and intelligence-enabled infrastructure solutions can help make a difference. She has focused on investing in water technologies such as the measurement systems for water utilities made by Roper Technologies (ROP). "Water meters are remarkably complex and the new generation of software and digital meters enables utilities to reduce deployment time, improve network performance, reliability, and security. Smart water meters can even help find leaks or tampering," she says.
Improving the quality of the water itself is another priority for an infrastructure overhaul. Evoqua (AQUA) is a company whose technologies--such as reverse osmosis, ion exchange, granular active carbon, and oxidation processes -- may benefit from the growing emphasis on removing so-called forever chemicals such as per- and polyfluoroalkyl substances (PFAS) from public water supplies.
Glazer says, "I believe water industry revenue could grow 4% to 6% per year and companies that are able to innovate and provide new technology and solutions could grow by multiples of that rate."
Fidelity® Select Industrials Portfolio held securities mentioned in this article as of their most recent holdings disclosure. For specific fund information, including holdings, please click on the fund trading symbols above.
It remains to be seen, though, whether any new infrastructure bill would mandate improved maintenance of water systems, or simply send more money to local governments who may have mismanaged their existing infrastructure.
Many state and local governments pay to build and maintain infrastructure by issuing tax-free bonds. Elizah McLaughlin, co-manager of Fidelity® Municipal Income Fund (FHIGX), says a federal infrastructure bill would have implications for municipal bond investors. The prospect of higher taxes has increased demand for munis so far in 2021 and the issuance of new bonds could increase if the federal government commits to pay for more infrastructure spending. A greater federal role in infrastructure would free up resources and allow municipal governments to fund other projects for which they would issue new bonds.
A key unknown for muni investors, says McLaughlin, is whether Washington will offer grants to local governments or subsidies for interest payments on newly issued taxable debt. Amid the global financial crisis, the Obama administration launched a program to subsidize the issuance of taxable Build America Bonds by municipal governments and some observers expect Obama's former vice president to consider reviving this approach as part of a future infrastructure spending package.
While much of the need for infrastructure spending in the US involves replacing or repairing aging water systems, roads and bridges that in some cases date from the 19th century, other areas of the world have been building brand new infrastructure at a rapid pace over the past few decades and will resume doing so as COVID-19 infections decline and demand recovers.
The World Economic Forum estimates that the worldwide shortfall between the value of new infrastructure that is needed and the amount that governments plan to spend on it will grow to $15 trillion by 2040. In some countries, the gaps between government spending and infrastructure demand may be partially filled by public-private partnerships that have become increasingly common outside the US.
Against this backdrop, Kirpalani has been focused on infrastructure investment around the world as well as in the US. As he does in the US, he's looking for opportunities in utilities and infrastructure segments tied to cell towers and data centers, many of which experienced increased demand because of COVID-19. He says companies such as Cellnex Telecom (CLNX.MC), a wireless communication infrastructure provider based in Spain, have fared better than airports and toll roads, which suffered due to reduced travel amid the pandemic.
Fidelity® Infrastructure Fund held securities mentioned in this article as of their most recent holdings disclosure. For specific fund information, including holdings, please click on the fund trading symbols above.
The number of mutual funds and ETFs that invest in infrastructure has grown in recent years. Investors interested in diversifying their portfolios with infrastructure investments can run screens using the Mutual Fund and ETF Evaluators on Fidelity.com. Below are the results of some illustrative mutual fund screens (these are not recommendations of Fidelity).
- Invesco Global Infrastructure Fund (GIZAX)
- MainStay CBRE Global Infrastructure Fund (VCRAX)
- JHancock Infrastructure Fund (JEEBX)
- Global X US Infrastructure Development ETF (PAVE)
- FlexShares Stoxx Global Broad Infrastructure Index Fund (NFRA)
- iShares Global Infrastructure ETF (IGF)
The Fidelity screeners are research tools provided to help self-directed investors evaluate these types of securities. The criteria and inputs entered are at the sole discretion of the user, and all screens or strategies with preselected criteria (including expert ones) are solely for the convenience of the user. Expert screeners are provided by independent companies not affiliated with Fidelity. Information supplied or obtained from these screeners is for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell securities, or a recommendation or endorsement by Fidelity of any security or investment strategy. Fidelity does not endorse or adopt any particular investment strategy or approach to screening or evaluating stocks, preferred securities, exchange-traded products, or closed-end funds. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use. Determine which securities are right for you based on your investment objectives, risk tolerance, financial situation, and other individual factors, and reevaluate them on a periodic basis.