Omicron Selloff Creates Opening to Buy Traditional Infrastructure ETFs
- By John Tierney
- 2 min read
Summary
• The Omicron market selloff brought ETFs focusing on US traditional infrastructure back to earth after they rallied strongly in November.
• We recommend investors start overweighting IFRA, PAVE and PKB ETFs versus underweighting the S&P 500 via the SPY or IVV ETFs. All three focus on companies involved in traditional infrastructure in the US.
• They should benefit as money from the Infrastructure and Jobs Act starts flowing.
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Summary
- The Omicron market selloff brought ETFs focusing on US traditional infrastructure back to earth after they rallied strongly in November.
- We recommend investors start overweighting IFRA, PAVE and PKB ETFs versus underweighting the S&P 500 via the SPY or IVV ETFs. All three focus on companies involved in traditional infrastructure in the US.
- They should benefit as money from the Infrastructure and Jobs Act starts flowing.
One casualty of the Omicron market selloff is ETFs focusing on US traditional infrastructure. Unsurprisingly, they surged in November as it became apparent Congress would pass the basic infrastructure bill, and after President Joe Biden signed the Infrastructure and Jobs Act on 15 November 2021 (Chart 1).
More broadly, these ETFs have waxed and waned during 2021 as the outlook for the infrastructure bill changed.
We recommend investors start accumulating or overweighting PAVE, PKB, and IFRA, and underweighting the S&P 500 via the SPY or IVV ETFs. All three focus on US-based infrastructure companies that derive at least 50% of their revenue from the US (Table 1).
All three of these ETFs have a small stock focus. Small stocks (e.g., the Russell 2000) have underperformed the large-cap S&P 500 for much of 2021 as technology companies continue to lead the market and smaller companies bear more of the brunt of supply chain backups and labour shortages. Apart from rising infrastructure spending, these ETFs will benefit as smaller stocks catch a renewed bid.
As we discussed previously, various other infrastructure ETFs exist. But they focus on traditional infrastructure outside the US and have performed poorly relative to the S&P 500 and US-focused infrastructure ETFs. These include, among others EMPL, FLM, GII, GLIF, IGF, NFRA, and TOLX. No other countries are planning new major infrastructure programs apart from clean energy, but that is a separate subsector. Some of these international infrastructure ETFs may be positioned to increase US exposure, but we currently lack insight on which might benefit from the new legislation.
Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)