Fresh off the $1.9 trillion coronavirus stimulus package, the Biden Administration is now eyeing $3 trillion in infrastructure spending.
That's an massive figure – one that's sure to draw concerns about inflation – but it's also necessary. Earlier this month, the American Society of Civil Engineers (ASCE) issued a report with a grade of C- for U.S. infrastructure. Underscoring how bad the situation is here, that grade is an improvement.
“For the first time in 20 years, our infrastructure GPA is a C-, up from a D+ in 2017. This is good news and an indication we’re headed in the right direction, but a lot of work remains,” the ASCE report said.
Of course, need and related outcomes when politicians are involved are two different things. Perhaps this time will be different when it comes to infrastructure – an issue the U.S. has failed to address on a large-scale basis since the Eisenhower Administration.
I'm not a political prognosticator or pundit, but I'll pass along some information I've read elsewhere. First, the president's party usually loses Congressional seats in mid-term elections. The Democrats' House majority is already thin and if they cede that chamber in November 2022, ambitious legislative items will likely stall.
Second, the White House needs to keep a slew of promises to green energy groups that supported President Biden during the 2020 campaign. Big infrastructure spending is a way of doing that.
Tangible Ideas for Advisors to Discuss with Clients
With its $3 trillion price tag, the Biden infrastructure plan is getting plenty of attention and it carries with it plenty of investment implications – something advisors and clients are aware.
Advisors can get ahead of this conversation in a variety of ways, but when it comes to specific ideas, exchange traded funds are ideal infrastructure avenues for many client portfolios. An interesting place to start is with the First Trust RBA American Industrial Renaissance ETF (NASDAQ:AIRR).
AIRR isn't a run-of-the-mill industrial ETF as it's not dedicated to that sector and features smaller stocks, but it is levered to the theme domestic infrastructure spending.
AIRR's “methodology provides decidedly domestic exposure to the manufacturing industry. Not only are the companies in the portfolio domiciled in the US, they also generate approximately 91% of their revenue domestically, according to FactSet,” notes First Trust. “We believe many of AIRR’s holdings may be well positioned to benefit if companies shift more of their supply chains back to the US in the wake of the COVID-19 pandemic in order to mitigate the risk of future supply disruptions.”
Additional perks of AIRR include it having little overlap with standard industrial sector ETFs and that, by traditional valuation metrics, the fund is inexpensive relative to large-cap industrial fare.
As noted above, climate and environmental groups hold considerable political sway. They know it and the White House should know it. Bottom line: Infrastructure is a fine platform for advancing a renewable energy agenda.
That could prove to be a plus for ETFs such as the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (NASDAQ:GRID). As the winter storm in Texas and seemingly every summer in California prove, electrical grids in the U.S. are in dire need of enhancements and currently aren't suited to meet increasing demand for renewable energy.
For investors with long-term horizons and for clients that are attune to the changing complexity of the U.S. energy mix, GRID is a viable satellite position for advisors to discuss.
“In our view, a paradigm shift in electrical power generation and distribution may be under way due to the advent of affordable wind and solar power, new energy storage technology, and the proliferation of microgrids, among other trends,” says First Trust. “For this transition to occur, massive capital investments to upgrade electrical infrastructure around the world will be needed. According to Bloomberg New Energy Finance, global spending on the power grid could reach $14 trillion from 2020-2050 in this scenario.”
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