Infrastructure funds have steamrolled much of their competition this year, and, with the promise of $1 trillion in
infrastructure spending under the Trump administration, money has been pouring into the funds. But if your clients bring up the subject, you should be sure they know the dangers as well.
Open-end infrastructure funds have pulled in a net $175 million in new assets in 2017 through February, according to Morningstar Inc. Infrastructure ETFs have gained an estimated net $61.6 million in the three months ended February.
These are not new funds. SPDR S&P Global Infrastructure ETF (GII) and iShares Global Infrastructure ETF (IGF), two giants of the category, both launched in 2007. (The oldest infrastructure fund, Infrastructure (FLRUX), started in 1996.) And by and large, the companies within the funds are relatively unremarkable. "They're all some combination of utilities, industrials and energy stocks, said Dave Nadig, CEO of ETF.com.
The argument for infrastructure now — aside from the
occasional massive bridge fire — is, of course, President Donald J. Trump's call for $1 trillion in new infrastructure spending. While pledges of infrastructure spending aren't novel — both presidents Barack Obama and George W. Bush endorsed infrastructure spending — the promise has begun to fade. Although the funds have held onto their gains since the
House failed to repeal and replace the Affordable Healthcare Act, investors are becoming increasingly skeptical that the White House will, in fact, get that much spending approved.
"I think, given where expectations are for infrastructure, there's a bit more room for disappointment there than other policy-driven plays," said Dan Suzuki, senior equity strategist for Bank of America Merrill Lynch. "That will be more highlighted as the year goes on."
One problem: Infrastructure isn't the Trump administration's top priority, nor is it the Republican party's top concern. Tax reform tops the list of Republican goals this year — and, as legislators are figuring out, tax law is a complicated thing. "Tax reform will come with its own strains on the budget," Mr. Suzuki said. Those strains will make it harder for an already budget-conscious House to pass spending increases.
Furthermore, the nation's economy isn't in a state of emergency and therefore in dire need to strong fiscal stimulus, Mr. Suzuki said. "First and foremost, the biggest headwind to infrastructure is the lack of appetite for more spending.
Most infrastructure funds are global. "That's not a new story for the rest of the world," Mr. Suzuki said. "Japan and Europe have been spending more on infrastructure for over a year, and China has been trying to rebalance away from infrastructure spending," Mr. Suzuki said.
Unfortunately, many of the infrastructure names aren't cheap — thanks in part to the recent runup. The average infrastructure ETF has gained 7.16% this year, versus 5.97% for the S&P 500. The average price-to-earnings ratio of iShares Global Infrastructure ETF is 20, based on forward earnings projections. The S&P 500's forward PE is 18.21.
"The question that clients need to ask themselves is 'Do you really think there will be $1 trillion in infrastructure spending?'," Mr. Nadig said. "If you do, then not all of that is reflected in the funds' share prices." If you're skeptical, however, it's probably a good idea to wait for prices to back down a bit.
