Summary
- The PAVE ETF is up ~12% and outperformed the S&P 500 by ~11% since my buy-rated article of last April.
- However, and despite the high inflation and higher interest rate headwinds, this ETF has much farther to run because the infrastructure investment story is just getting started.
- This fund has a five-star rating from Morningstar, a rather stiff 0.47% expense fee, but has three-year average annual return of 15%.
- Top holdings in the "re-industrialization of America" themed portfolio include United Rentals, Eaton, Nucor, Trane, Deere, Sempra Energy, and CSX.
Last April, Seeking Alpha published my buy-rated article: The PAVE ETF Will Benefit From $2+ Trillion U.S. Infrastructure Plan . Since that time, and as the graphic below shows, the Global X U.S. Infrastructure ETF ( PAVE ) has outperformed all of the broad market averages (the S&P 500, DJIA, and the Nasdaq-100) as represented by the ( VOO ), ( DIA ), and ( QQQ ) ETFs, respectively. However, the Biden administration's bipartisan Infrastructure Act will be funding new infrastructure and re-industrialization projects for years to come. Many of the same companies in the PAVE portfolio also will be direct beneficiaries of the Clean-Energy Act (also known as the "IRA" legislation) and the CHIPs & Science Act as well. That being the case, I suspect this industrial-company based ETF is offering investors excellent total returns for years to come. Today, I'll take a closer look at the PAVE portfolio.
Investment Thesis
The investment thesis here is both clear and relatively straight-forward: Industrial companies are going to benefit from the funding provided by passage of three major pieces of legislation that are the backbone of President Biden's economic plan:
- The bipartisan Infrastructure Act
- The Clean-Energy Act (also know as the "Inflation Reduction Act")
- The CHIPs & Science Act
In aggregate, these pieces of legislation will spend more than $3 trillion to repair and build new road, bridges, dams, and water infrastructure; to provide funding to help build out a nationwide EV charging network, new electric transmission lines to feed renewable energy supplies from source to demand, and high-speed internet access for rural America; they will assist in the building of new battery material and manufacturing supply-chains; and they will give tax-breaks for EVs built in America and for renewable energy electric power generation projects.
With that as background, let's take a look to see how the PAVE ETF has positioned investors for success going forward.
Top 10 Holdings
The top 10 holdings in the Global X U.S. Infrastructure Development Fund are shown below and were taken directly from the PAVE ETF webpage , where you can learn more detailed information about the fund. The top 10 holdings equate to ~31% of what I consider to be a very well-diversified portfolio of 98 industrial companies:
The #1 holding is United Rentals ( URI ) with a 3.3% weight. That might appear to be an odd choice for an infrastructure fund, but URI rents general construction and industrial equipment like backhoes, forklifts, earth moving equipment, aerial work platforms, as well as general tools and light equipment like pressure washers, water pumps, and power tools. The stock is up 41% over the past year and yet currently trades with a forward P/E of only 11x.
Ireland-based Eaton Corp ( ETN ) is the #3 holding with a 3.2% weight. Eaton specializes in designing and manufacturing electrical components, industrial components, power distribution and assemblies, residential products, as well as single and three phase power transmission products. ETN stock is +13% over the past year, has a forward P/E = 20.6x, and yields 1.90%.
Steel producer Nucor ( NUE ) is the #4 holding with a 3.1% weight. Nucor's Q4 earnings report was a beat on both the top and bottom lines. Full-year 2022 earnings were an annual record for the company. Yesterday, Seeking Alpha reported that Nucor has "raised prices by $360/st over six price hikes since late November, according to Argus ." Nucor stock is up 39% over the past year.
Deere ( DE ) is the #8 holding with a 3.1% weight. Deere has been making a killing on designing and selling automated and autonomous farm and construction equipment. The Q4 and full-year 2022 earnings report was a strong top and bottom line beat . Q4 revenue was $12.65 billion (+32.2% yoy) and a $1.51 billion beat. The company raised the midpoint of FY23 net-income guidance from the previous $8.25 billion to $9 billion. CEO John May said:
Deere's first-quarter performance is a reflection of favorable market fundamentals and healthy demand for our equipment as well as solid execution on the part of our employees, dealers, and suppliers to get products to our customers. We are, at the same time, benefiting from an improved operating environment, which is contributing to higher levels of production.
Sempra Energy ( SRE ) is the #9 holding. Sempra is teaming up with ConocoPhillips ( COP ), and others, to build a new LNG export terminal on the U.S. Gulf Coast in Port Arthur, TX. (see COP Pivots To LNG ).
The top 10 holdings are rounded out by #10 holding and railway company CSX Corp ( CSX ) with a 2.8% weight. CSX will benefit from the re-industrialization of the U.S. by shipping raw materials, equipment, and pre-fabricated components across the country from source to the destination of project demand.
From an overall portfolio perspective, the PAVE ETF is primarily exposed to the industrial and materials sectors:
That being the case, this would be an excellent ETF for those investors who already have a full position in, say, the utilities Sector but want addition exposure to the infrastructure boom.
Performance
Despite the drop over the past year, the five-star rated PAVE ETF has a strong performance track-record with a life-of-fund average annual return of nearly 11%:
The following graphic compares the three-year total returns performance of the PAVE ETF with infrastructure related peers like the First Trust Water ETF ( FIX ), the iShares Metals and Mining ETF ( PICK ), the iShares U.S. Infrastructure ETF ( IFRA ), and the SPDR S&P Global Infrastructure ETF ( GII ):
As can be seen in the graphic, the PAVE ETF has outperformed all the others in the group other than the PICK ETF, which has done extraordinarily well.
Risks
The PAVE ETF is certainly not immune to the macro-economic risks of high inflation, higher interest rates, and the impact of Russia's invasion of Ukraine. That said, government-funded infrastructure projects are likely to be a relatively easy path for companies to pass-through inflation related cost pressure directly on to their customers (i.e. private companies and the government).
Summary and Conclusion
In my opinion, the PAVE ETF is ideally positioned to deliver strong returns for investors going forward. Although down ~7% over the past year, this is an aberration in an otherwise very strong long-term performance track-record and therefore presents an excellent entry point for investors. PAVE is a Buy.
I'll end with a three-year total returns comparison of the PAVE ETF vs. the broad market averages represented by the Vanguard S&P 500 ETF, the DJIA ETF, and the triple Qs that represent the Nasdaq-100 and note that the PAVE ETF has significantly out-performed all three:
For further details see:
The PAVE ETF: Infrastructure Investment Thesis Still Fully Intact