Unlocking US Infrastructure Potential: A New Horizon for Australian Investors

The infrastructure investment landscape has significantly evolved. Gone are the days when it was solely about commodities, energy, and fixed assets like utilities. Today, the focus has shifted towards advanced materials, cutting-edge technologies, and modern equipment required for maintenance and growth. This shift not only promises better growth prospects but also aligns with government policies ensuring lower leverage and potentially higher returns for investors.

Key Takeaways

• Evolving Infrastructure Landscape: The shift towards advanced materials and modern technologies highlights the need to move beyond traditional utility investments to capture better growth and returns.
• Strong Performance: With its focus on US industrial firms and supportive government policies, PAVE outperforms peers in growth, profitability, and risk management. However, it carries risks such as the cyclical nature of the industrial sector and less geographic diversification.
• Limited Options for Australians: Most infrastructure-related ETFs available to Australian investors focus on global utilities. PAVE¹, which tracks the Indxx US Infrastructure Development Index², provides unique exposure to the rising activity in US infrastructure development.

Identifying Infrastructure Opportunities for Australian Investors

Australian investors have a variety of options for infrastructure investments, including both domestic and international ETFs. Among the key passive ETFs available in the Australian market are Global X US Infrastructure Development ETF (PAVE), Vanguard Global Infrastructure Index ETF (VBLD), VanEck Global Infrastructure (Hedged) ETF (IFRA), and iShares Core FTSE Global Infrastructure ETF (AUD Hedged) (GLIN). Additionally, the Magellan Infrastructure Fund (Currency Hedged) (MICH) offers an active approach to infrastructure investment.³

To explore the best opportunities, we focus on the underlying indices these ETFs track. PAVE follows the Indxx US Infrastructure Development Index (IPAVE), which is centered on US industrial companies. In contrast, VBLD, IFRA, and GLIN track the FTSE Developed Core Infrastructure Index (FDCI), which is globally oriented and predominantly focused on utilities.⁴ Notably, GLIN and IFRA are hedged versions tracking the same underlying index. MICH, being actively managed, also leans heavily towards utilities on a global scale.

The difference in geographical and sector focus significantly impacts the types of companies included and their respective growth and return profiles. IPAVE’s focus on US industrial companies means it captures the benefits of improving US infrastructure and aligning with government policy tailwinds. This involves a strong emphasis on advanced materials, technology integration, maintenance, and transportation. On the other hand, the global and utility focus of FDCI, and MICH leans towards traditional utility and energy companies, providing a broader but more conventional exposure to infrastructure investments.⁵

Financial Metrics: Evaluating Growth, Profitability, and Stability

Investing in US infrastructure development offers promising growth and financial stability, especially when focusing on advanced materials, cutting-edge technology, and maintenance services. Companies within IPAVE are at the forefront of innovation and modernisation. Their commitment to technological advancements has driven impressive growth, with a three-year historical annual sales growth of 13.6% and a three-year projected growth estimate of 11.8%, based on market cap weighted averages.⁶ These figures highlight the robust growth potential compared to companies in the FDCI, tracked by ETFs like VBLD, IFRA, and GLIN, and MICH. Both MICH and the FDCI have a significant focus on utilities, but FDCI has a higher percentage of utility constituents compared to MICH.

Financial stability is another hallmark of IPAVE’s underlying companies. With a net debt to equity ratio of 73.6% and a higher current ratio, these companies show better financial health and lower leverage compared to many peers.⁷ This lower leverage ratio reflects prudent financial management and resilience against economic fluctuations, further supported by their alignment with government initiatives. The backing of policies like the Infrastructure Investment and Jobs Act (IIJA), Inflation Reduction Act (IRA), and the CHIPS and Science Act (CHIPS) provides these companies with substantial support,⁸ enhancing their stability and reducing financial risk.

Moreover, the companies within IPAVE demonstrate strong investor returns in terms of returns on equity (ROE), return on assets (ROA), and return on invested capital (ROIC), showcasing their profitability and efficient use of capital. While the valuation (based on price-earnings ratio) of IPAVE may be slightly higher, this premium reflects the better growth prospects and higher quality of its underlying companies. Investors are essentially paying for the strong revenue and EPS growth, as well as the robust financial health demonstrated by these metrics (refer to table below).⁹

Performance and Volatility: Risk and Return Profiles

To dig deeper into these ETFs, it’s crucial to consider their historical performance and volatility.¹⁰ The Indxx US Infrastructure Development Index (IPAVE) has demonstrated robust growth rates, reflecting its strong performance profile compared to its peers.
IPAVE’s impressive growth is evident in its one-year return of 33% and five-year return of 159%.¹¹ This outperformance can be attributed to several factors, including US infrastructure policies like the IIJA, which have spurred significant investments in infrastructure modernisation. Additionally, the adoption of advanced technologies and materials has further driven growth within the US infrastructure sector.

When assessing risk, IPAVE’s beta indicates higher volatility relative to FDCI and MICH. However, this increased risk is balanced by better risk-adjusted returns, as shown by IPAVE’s higher Sharpe and Sortino ratios.¹² These metrics suggest that IPAVE provides better returns for the level of risk taken, offering a favourable risk-reward profile. Examining drawdowns and recovery times, IPAVE showcases its resilience. The index’s ability to rebound swiftly from market downturns highlights the stability of its underlying companies. This resilience is further supported by the robust financial health of these companies, which is reflected in their strong balance sheets and lower leverage ratios.

Conclusion: Embracing the Future of Infrastructure Investment

The transformation of the infrastructure sector into a more complex and innovation-driven domain underscores the importance of understanding the key drivers of this change. Advanced materials, cutting-edge technologies, and robust regulatory support are central to modern infrastructure development. These elements enhance durability, efficiency, and sustainability, reshaping the investment landscape.

For investors seeking exposure to a diversified portfolio of companies demonstrating strong financial health and consistent performance, PAVE presents a compelling option. By aligning with the evolving needs of the infrastructure landscape, PAVE ensures that investors can capitalise on the promising opportunities presented by the future of infrastructure development. Through its robust growth prospects, efficient cost management, strong financial health, and enhanced returns¹³, PAVE stands out as a leader among infrastructure-focused ETFs.

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.