North American infrastructure is on the verge of receiving its biggest investment in more than 50 years thanks to the Infrastructure Investment and Jobs Act.
From traditional civil infrastructure to green energy and utilities, our latest blog explores how investors can potentially benefit from the historic investment and gain exposure to the theme through the Horizons North American Infrastructure Development Index ETF (BLDR).
On November 5, 2021, with bipartisan support, the U.S. Congress passed the Infrastructure Investment and Jobs Act, a $1.2 trillion infrastructure bill that is set to catalyze a historic level of investment in America’s civil infrastructure from highways, bridges, and railways to updating and expanding the country’s green energy production and electrical grid. Having previously passed through the U.S. Senate in August, the bill will be signed and passed into law by President Joe Biden, while the “social infrastructure” of Biden’s broader Build Back Better Plan continues to be debated.
What’s in the $1.2 Trillion Bipartisan Bill
While the total $1.2 trillion figure includes funding normally allocated each year for highways and other infrastructure projects, there is over $500 billion of new infrastructure spending, including:
|>$110 billion for roads and bridges||>$66 billion for railroads|
|>$55 billion for water infrastructure||>$47 billion for cybersecurity and climate change|
|>$21 billion for the environment||>$11 billion for safety|
|>$7.5 billion for electric school buses||>$7.5 bill for electric vehicle charging stations|
|>$65 billion for the power grid||>$65 billion for broadband|
|>$39 billion for public transit||>$25 billion for airports|
|>$8 billion for western water infrastructure|
Source: Investopedia, November 5.
The “Social Infrastructure” bill still being debated also currently contemplates:
$550 billion for clean energy and climate: The plan proposes cutting greenhouse gas pollution by over a gigaton in 2030, reducing consumer energy costs, helping to create more clean air and water, and creating hundreds of thousands of jobs.
> The plan invests in affordable housing, including construction and rehabilitation of homes, as well as investments in rental assistance and housing vouchers.
Historical & Current Assessment
As the world’s largest market and the third largest country in the world by land mass, the U.S. has required and been empowered by its expansive infrastructure, from its interstate highways to its utilities systems. Much of that foundational infrastructure that has contributed toward America’s economic might was initiated during and shortly after World War II, funded by massive infusions of public money. In the 1950s, the U.S. government began developing the highway infrastructure that would ultimately lead to the U.S. interstate highway system – the second largest in the world, with over 46,876 miles of pavement.
But since the 1970s, overall investment in U.S. infrastructure in relation to GDP has been in decline. While declining infrastructure investment relative to GDP has occurred in other countries, it appears to have happened earlier in the United States, without significant investment since.
That might be one of the reasons the U.S. fell from fifth place in 2002 to 13th in 2019 on the quality of its infrastructure, according to the World Economic Forum.
The new infrastructure funding has the opportunity to rejuvenate American infrastructure, generate new jobs, boost the economy, and ultimately, the fortunes of infrastructure development companies throughout North America.
Invest in the North American Infrastructure Boom with BLDR
On October 26, 2021, we launched the Horizons North American Infrastructure Development Index ETF (“BLDR”). The launch of this ETF anticipated the massive investment that would be spurred by the Biden infrastructure plan in the U.S., as well as ongoing increases in Canada’s infrastructure funding, including those outlined in the Investing in Canada plan – a program designed to invest $180 billion over 12 years into Canadian infrastructure, including public transit, broadband networks and energy systems.
BLDR seeks to replicate, to the extent possible and net of expenses, the performance of an index designed to provide exposure to the performance of North American publicly listed companies generally engaged in the development and production of infrastructure project building materials and equipment, as well as the logistics, construction and engineering services used for the development and maintenance of infrastructure projects. BLDR seeks to hedge any U.S. dollar portfolio exposure back to the Canadian dollar at all times.
Currently, BLDR seeks to replicate, directly or indirectly, the performance of the Solactive North American Infrastructure Development Index (the “Underlying Index”), net of expenses. Some features of the Underlying Index include:
- The Underlying Index will hold 50 eligible constituent names which are rebalanced quarterly based on their market capitalization
- Constituents issuers will be drawn from publicly listed companies headquartered in North America and may include small-, mid- and large-capitalization companies. In addition, a company must meet minimum trading, liquidity and market capitalization requirements to be considered for inclusion.
- A company is considered to be an “Infrastructure Development Company” if it is classified according to the Index provider as primarily operating in any of the following segments: Transportation Infrastructure Construction, Transportation Operators, Telecommunication Infrastructure, Water and Energy Infrastructure, Infrastructure Materials and Components, Infrastructure Construction, and Construction Machinery – these are referred to as the Underlying Index Categories
- The highest ranking, by market capitalization, Canadian headquartered security is selected from each Underlying Index Category. The maximum weight of an Underlying Index Constituent is 10%
- On each selection day the minimum aggregate weight of Canadian headquartered companies in the Underlying Index is 20%
While other infrastructure ETFs exist in Canada that offer exposure to Canadian infrastructure, U.S. infrastructure, or both, BLDR is differentiated in its scope that provides exposure to the broader “Infrastructure Development” sector, which allows the ETF to capture other companies that enable and empower infrastructure going beyond the heavy weights in energy and utilities that we see in many other infrastructure mandates. The Underlying Index was chosen in order to allow for the inclusion of industries such as railways and construction equipment firms, because there is a strong investment case that can be made for their prominence in the infrastructure growth of the future.
To some, rail conjures up a sentiment of a historically important but antiquated method of transportation but in 2019, Canada’s railways invested a record breaking $3.1 billion in new capital programs to support growth and service enhancements. While the US has lagged behind in recent years on railway investment, the $66 billion allocated in the Infrastructure bill could galvanize the sector and confirm its continued importance in moving goods around North America.
Utility companies that are involved in the generation, distribution and management of electricity across the country are also not frequently considered within the infrastructure bucket but without them, the energy needed to power projects and infrastructure wouldn’t be possible. One of the key areas of focus of the Biden Infrastructure plan is to modernize the power grid with a $65 billion investment. This includes fortifying it against the impacts of climate change – the importance of which was exemplified during the 2021 Texas Power Crisis when frigid snowstorms cut power from millions of homes for multiple days, leading to deaths and a federal emergency declaration issued.
BLDR: Holdings in Focus
Here’s a deeper look at three of BLDR’s top 10 holdings (as at October 31, 2021). For BLDR’s full list of holdings please visit https://www.horizonsetfs.com/ETF/bldr#holdings
Canadian National Railway is Canada’s largest railway, both in revenue and by total track length. Over the years, CN Rail has expanded its reach throughout North America through the purchase of American railways, connecting its Canadian coast-to-coast network through the heart of U.S.
With the historic investment in rail as outlined by the Infrastructure Bill, companies like CN Rail are poised to potentially benefit from an increased development of rail infrastructure and an intent to utilize rail, seen as a climate conscious alternative, with railroads three to four times more fuel efficient than trucking based transportation.
Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial turbines, and diesel-electric locomotives. In 2020, Caterpillar Inc. sales and revenues exceeded $41.7 billion.
As a manufacturer of the equipment needed to develop infrastructure, Caterpillar is likely to benefit by providing the “picks and shovels” any infrastructure project development requires. Currently, the Caterpillar product line includes more than “300 machines, 1,200 attachments, hundreds of power systems and millions of parts”, as well as technology services.
Caterpillar also generates revenue as a financial services provider through Caterpillar Financial Services.
Emerson Electric is an American company that globally manufactures products and provides engineering services for industrial, commercial and consumer markets. In 2020, Emerson Electric saw revenue of $16.785 billion.
A significant portion of Emerson Electric’s revenue is derived from its automation solutions stream, which includes their software, consulting and service-side offerings to enable infrastructure project development.
Owning the Builders – A Better Approach?
Infrastructure remains one of the top targets for inflows in Thematic ETFs. In the United States, the Global X US Infrastructure Development ETF (PAVE) had the 2nd most inflows of any U.S. listed Thematic ETF in 2021 thus far – $3.3 billion. The Index methodology used by BLDR’s Underlying Index is similar to PAVE in that it’s a heavier focus on the infrastructure builders rather than the infrastructure users, with the big differentiator in that it has meaningful Canadian exposure of at least 20% of the portfolio at each rebalance.
Even in Canada, significant inflows have gone into infrastructure ETFs, with about $1.2 billion currently invested in Infrastructure ETFs according to National Bank as at September 30, 2021. The big differentiator with BLDR is the focus on industrial sectors doing the manufacturing and building relative to competitors which have bigger over-weights to energy, utilities and real estate.
When compared to most competitor mandates in Canada, BLDR has a large exposure to industrials – of which the sub-categories largely reside. Again, these are the companies doing the manufacturing and building of the North American “rebuild” theme.
Of course, this has also helped the relative performance of BLDR’s Underlying Index as the industrial industry categories focused on “building” have generated strong returns over the last year.
Source: Bloomberg, as at October 31, 2021.
The indicated rate of return is the historical annual compounded total return including changes in index unit value and reinvestment of all distributions and does not take into account sales, transaction, brokerage, redemption, distribution or optional charges or income taxes payable by any investor or investment fund in replicating the index, that would have reduced returns. The index is not directly investible. Index returns are not guaranteed, their values change frequently and past performance may not be repeated.
For investors seeking exposure to the current and soon-to-be historic federal investment in U.S. infrastructure, BLDR is a potentially compelling solution for achieving simple and diversified access to many of the companies that are likely to be involved and benefit from the renewed infrastructure boom, the actual builders as opposed to real estate, energy and utilities that are dominant weights in other “infrastructure” labeled mandates.
As populations increase across North America over the coming decades – with the U.S. expected to cross the 400 million mark by 2058 – the need for infrastructure to support the growing demand will become increasingly necessary. The Biden Infrastructure Bill is a start but is unlikely to be the last infrastructure investment. In Canada, according to a medium-growth scenario, our population should reach 52.6 million by 2061. Given the state of this country’s housing crisis in certain markets, the amount of infrastructure and development that will be needed to absorb that population growth will require a significant investment and undertaking.
BLDR is an ETF built for investors that are optimistic about the future of North America. Communities will always need infrastructure to move around, to live, work, and play, and BLDR offers the chance for investors to potentially capitalize on its growth.
The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.
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