Introducing PAVE: The Resurgence of US Infrastructure

Infrastructure is one of the backbones of economic prosperity and societal well-being, and here, in the 21st century, it has never been more crucial. As the world grapples with unprecedented challenges—from rapid urbanisation and climate change to technological disruption—modern, resilient infrastructure systems are vital for sustainable development. Furthermore, consequences of geopolitical tension have driven a trend of deglobalisation, reshaping future infrastructure development and providing new, government-backed, opportunities for investors to capitalise upon.

The Global X US Infrastructure Development ETF (ASX: PAVE) aims to capture a resurging focus on infrastructure in the world’s largest economy. It does so by investing in US-domiciled companies involved in the construction, engineering, material procurement, transportation, and equipment distribution processes of infrastructure projects.

Key Takeaways

• US infrastructure suffers from a US$3.8 trillion investment gap which must be closed to maintain and support the growing economy, as well as societal well-being.¹
• In recent years, the US has initiated multiple programs including the IIJA, IRA, and CHIPS Act which provide investment incentives for both disruptive and traditional sectors and are tailwinds for increased infrastructure development demand.²
• PAVE uses a different approach from traditional infrastructure investing which circumnavigates maintenance expenses to maximise diversification and return on investment.

The State of the States

Despite being the world’s leading economy, the US’s outdated infrastructure assets are in dire need of a 21st century overhaul, evidenced by the country’s continually declining global ranking in infrastructure.³

According to the World Infrastructure Hub, the US currently requires at least US$3.8 trillion in additional investment to adequately repair existing infrastructure and keep pace with economic expansion.⁴ This figure marks the largest single country infrastructure investment gap in the world.⁵ For comparison, Asia as a whole has an estimated investment gap of US$4.6 trillion, of which China and India account for US$1.9 trillion and US$0.53 trillion respectively.⁶

Much of that shortfall is attributed to the expansive nature of the country combined with the cumulative lack of investment. While spending on infrastructure construction has nominally increased at an annualised rate of 4.5% over the last 22 years,⁷ it has actually decreased at an annualised rate of -2.5% once adjusting for inflation and real GDP growth.⁸ These numbers tell an even more troubling story when broken into various segments of infrastructure. In the table below, there is not a single segment that demonstrates real construction spending growth in the context of the economy. The power segment, which includes electric power generation & distribution, the storage and transportation of oil and natural gas, is the only category that comes remotely close to maintaining its base level investment growth relative to GDP over the past 20+ years. This is likely only due to the surge in investment toward clean and renewable energy infrastructure over the past half-decade.

As a result of this low level of investment, the US’s infrastructure assets including airports, ports, roads, and bridges all require significant enhancements. The American Society of Civil Engineers gave America’s infrastructure a “C-“ on its quadrennial ‘Report Card’ in 2021, and graded US roads a “D,” bridges a “C,” airports a “D+,” and ports a “B-,” noting that the country is “badly in need of greater investment in infrastructure”.⁹

Another rather bleak driver of US infrastructure spending is the growingly common occurrence of natural disasters thanks to climate change. In 2023, the US experienced a record-breaking 28 weather and climate disasters, each costing more than a billion USD.¹⁰ Those natural disasters cost the country roughly US$92B in total – which when added to the running sum of disaster costs in the US since 1980, comes to a shocking number that exceeds US$2.6 trillion.¹¹

More resilient infrastructure could vastly reduce these costs. For physical infrastructure, this means focusing on architecture, engineering, and planning. Traditional enhancements like raised roadbeds, proper drainage systems, and strengthened levies and sea walls, can all help protect infrastructure and property during extreme weather events. Luckily, some of these efforts are already underway: a 2020 survey of the 50 largest US cities found that more than 240 infrastructure resilience projects were in the pipeline, totalling US$47 billion in investments, of which ~60% are for managing flood risk.¹² More recently, the Biden-Harris administration announced nearly US$830 million in grants for 80 infrastructure resilience projects that would secure transportation and evacuation routes in the event of natural disasters.¹³

A Shift Driven By Policy

Deteriorating roads, waterways, airports and seaports are more than just an inconvenience to the largest economy in the world; they have become liabilities to the country’s economic future, affecting employment, productivity, public health, and quality of life. However, these circumstances may soon change, as the US has sought to aggressively address these issues over the past few years.

Passed in late 2021, the Infrastructure Investment and Jobs Act (IIJA) was considered by many to be a major step toward rebuilding America’s infrastructure. The bill contained US$550 billion in new appropriations through to 2030, of which roughly US$270 billion was allocated to transportation, US$90 billion to clean energy projects, and US$85 billion to water infrastructure and environmental remediation.¹⁴ In early November 2023, the Biden Administration reported that US$400 billion of the fund had been announced, spread across 40,000 projects at the state level. However, most projects in the tally remain in the planning stages with several more steps needed before construction can begin. Thus, we expect much of the investment to occur over the next few years, with the total thus far representing only a subset of what is to come. Still, many projects are moving forward already thanks to the bill. So far, the IIJA helped launch 7,800 bridge repair projects, jumpstarted renovation on 135,800 miles of roads, and funded 190 airport modernisation efforts.¹⁵

Apart from the introduction of the IIJA, the Inflation Reduction Act (IRA) and Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act are two further initiatives that the US parliament have passed into law. While neither act is specifically designated to infrastructure spending, both seek to bolster US competitiveness in disruptive technologies. As such, we expect the packages will encourage the build-out of manufacturing capacity, distribution networks, and other domestic supply chain assets – leading naturally to investment in infrastructure development. This can be seen in action through the increasing frequency at which the IRA and CHIPS Acts are mentioned on earnings calls of infrastructure development firms within the PAVE index.¹⁶

Of the three acts, the IRA, especially, builds on provisions in the IIJA to support increased renewable energy generation, expand transmission capacity, and further electric vehicle (EV) adoption and charging network deployment. In our view, investments in these segments can directly and indirectly boost demand for construction services and equipment. For example, according to the Department of Energy, total transmission infrastructure capacity in the contiguous United States is expected to grow 57% between 2020 and 2035 due to support from the IRA and IIJA.¹⁷ This forecast compares to just 16% growth in a baseline scenario where neither bill was passed.

Federal spending is also encouraging the private sector to act. Since the CHIPS Act and IRA passed in August 2022, private funding for areas like semiconductors, clean power and equipment, and EVs and batteries totalled US$886 billion as of April 2024.¹⁸ In this sense, the enormous topline numbers for these bills actually understate the magnitude of funding that could impact the U.S. infrastructure space over the next several years.

How Does PAVE Approach Infrastructure Investing?

Many approaches to investing in infrastructure tend to focus on the owners and operators of existing infrastructure assets, rather than on the companies that derive a significant portion of their revenues from building or maintaining infrastructure assets.

For example, over 90% of the US companies in the S&P Global Infrastructure Index are utilities and energy companies that own or operate infrastructure assets.¹⁹ While these companies do make investments to maintain and develop infrastructure, they potentially stand to benefit from only a minor portion of total infrastructure spending in the US. In 2023, these firms were responsible for less than a third of total infrastructure spending in the US.²⁰ In addition, much of these firms’ infrastructure spending will not be investments in new infrastructure, but an expense to maintain existing assets. Therefore, no additional cash flows are expected to be derived from that portion of their infrastructure spending.

When considering the portion of funds that are channelled towards building new infrastructure assets, additional revenue from these projects could still take years to materialise. Given the concentration of publicly traded infrastructure companies in the Utilities and Energy sectors, much of their investments are also concentrated in only a few segments of infrastructure. Therefore, companies in these sectors do not participate in a significant portion of infrastructure development, such as building roads, bridges, and water infrastructure.

Instead of focusing on companies that operate existing infrastructure assets, PAVE is designed to provide exposure to companies that can derive additional revenues from increased spending on both publicly and privately funded infrastructure projects, stand to earn these additional revenues regardless of whether the project is maintenance of existing assets or developing new infrastructure, and can collect these revenues years before the projects are completed. These companies include those involved in the construction and engineering of infrastructure projects, the production of raw materials, composites and products used in building infrastructure projects, producers and distributors of heavy construction equipment, and companies engaged in the transportation of materials used in infrastructure projects. It must be noted PAVE’s targeted approach may expose investors to sector concentration risk and is designed to be used as a satellite holding as a part of a well-diversified portfolio.

Related Funds

PAVE: The Global X US Infrastructure Development ETF (ASX: PAVE) invests in US-domiciled companies involved in the construction, engineering, material procurement, transportation, and equipment distribution processes of infrastructure projects.

^{Forecasts are not guaranteed and undue reliance should not be placed on them. This information is based on views held by Global X as at 27/05/2024.}

^{Past performance is not a reliable indicator of future performance.}

^{Diversification does not ensure a profit nor guarantee against a loss. Brokerage commissions will reduce returns. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.}