Investing in infrastructure, local and global

Key takeaways

• The federal government is increasing spending on infrastructure for transportation, water, broadband, and more.
• Companies that build or operate infrastructure may benefit.
• Infrastructure spending may create opportunities for investors in stocks, municipal bonds, and real estate investment trusts (REITs).
• The number of mutual funds and ETFs that offer exposure to infrastructure has increased in recent years. See below for investment ideas.

The $1 trillion bipartisan infrastructure plan President Biden signed into law in November 2021 contains upgrades to freight and passenger rail, repairs to roads and bridges, and improvements to water systems, with $550 billion of new funds directed to broadband, utilities, and transportation.

What does this mean for the individual investor?

How infrastructure spending can create investing opportunities

Increased government spending on infrastructure can benefit investors in companies that contract with governments to build and operate that infrastructure. Generally, investment in infrastructure operators has offered predictable returns thanks to the long-term contracts most of these companies hold with the governments who own the facilities they manage. Investment in construction companies that build infrastructure, whose earnings may rise and fall depending on economic and political shifts is more likely to expose investors to higher volatility, but also to potentially greater returns. In addition, companies whose products range from gravel and concrete to construction machinery and software may also all benefit from increased construction spending.

Pranay Kirpalani manages Fidelity^® Infrastructure Fund (FNSTX) and invests in companies that operate and manage infrastructure. He's optimistic about infrastructure investments and sees opportunity in trends tied to the long-term growth of 5G networks, e-commerce, cloud computing, and renewable energy. That optimism appears well-founded as the new federal spending package increases funding to expand digital infrastructure.

As Kirpalani looks forward, he says he sees continued opportunities in sectors such as communication towers and renewable energy that should benefit from multi-decade secular megatrends, as well as opportunities in the airport sector that has suffered over the past 2 years given COVID and travel restrictions. As the world opens back up, Kirpalani says he anticipates a strong rebound in leisure travel.

Like Kirpalani, Steve Buller, manager of Fidelity^® Real Estate Investment ETF (FPRO) also sees opportunity in internet infrastructure. He points to real estate investment trusts that own data-center and communications-tower properties as potential beneficiaries of rapid demand growth as telecommuting has gone mainstream.

Water

Another area where increased federal infrastructure spending may create opportunities in the US is in water and sewer systems, many of which are aging or suffering from inadequate maintenance. The federal bill calls for spending $105 billion on water-related infrastructure. About $55 billion will go towards replacing lead water pipes while another $50 billion will pay for systems to help manage floods and water shortages.

This new spending adds to an earlier $35 billion bipartisan bill intended to improve the nation's water systems, which are plagued by many of the issues common to old water systems worldwide. Due to poor management and old infrastructure, 30% to 40% of the global water supply is lost to leaking pipes, unauthorized use, corruption, or inefficiency according to the International Energy Agency.

Janet Glazer, manager of Fidelity^® Select Industrials Portfolio (FCYIX) says government spending alone won't fix these problems, but industrial companies with expertise, technology, and intelligence-enabled infrastructure solutions can help make a difference. She has focused on investing in water technologies such as the measurement systems for water utilities made by Roper Technologies (ROP). "Water meters are remarkably complex and the new generation of software and digital meters enables utilities to reduce deployment time, improve network performance, reliability, and security. Smart water meters can even help find leaks or tampering," she says.

Glazer says, "I believe water industry revenue could grow 4% to 6% per year and companies that are able to innovate and provide new technology and solutions could grow by multiples of that rate."

Fidelity® Select Industrials Portfolio held securities mentioned in this article as of their most recent holdings disclosure. For specific fund information, including holdings, please click on the fund trading symbols above.

It remains to be seen, though, whether any new infrastructure bill would mandate improved maintenance of water systems, or simply send more money to local governments who may have mismanaged their existing infrastructure.

Municipal bonds

Many state and local governments pay to build and maintain infrastructure by issuing tax-free bonds. Elizah McLaughlin, co-manager of Fidelity® Municipal Income Fund (FHIGX), says the federal infrastructure bill has implications for municipal bond investors. The issuance of new bonds could increase with the federal government spending more on infrastructure. A greater federal role in infrastructure could free up resources and allow municipal governments and transit authorities to fund other projects for which they would issue new bonds.

Think global

While much of the need for infrastructure spending in the US involves replacing or repairing aging water systems, roads, and bridges that in some cases date from the 19th century, other areas of the world have been building brand new infrastructure at a rapid pace over the past few decades and will resume doing so as COVID infections decline and demand recovers.

The World Economic Forum estimates that the worldwide shortfall between the value of new infrastructure that is needed and the amount that governments plan to spend on it will grow to $15 trillion by 2040. In some countries, the gaps between government spending and infrastructure demand may be partially filled by public-private partnerships that have become increasingly common outside the US.

Against this backdrop, Kirpalani has been focused on infrastructure investment around the world as well as in the US. As he does in the US, he's looking for opportunities in utilities and infrastructure segments tied to cell towers and data centers, many of which experienced increased demand because of COVID.

Fidelity® Infrastructure Fund held securities mentioned in this article as of their most recent holdings disclosure. For specific fund information, including holdings, please click on the fund trading symbols above.

Finding ideas

The number of mutual funds and ETFs that invest in infrastructure has grown in recent years. Investors interested in diversifying their portfolios with infrastructure investments can run screens using the Mutual Fund and ETF Evaluators on Fidelity.com. Below are the results of some illustrative mutual fund screens (these are not recommendations of Fidelity).

Mutual funds

Fidelity funds

• Fidelity^® Infrastructure Fund (FNSTX)
• Fidelity^® Water Sustainability Fund (FLOWX)

Non-Fidelity funds

• Invesco Global Infrastructure Fund (GIZAX)
• MainStay CBRE Global Infrastructure Fund (VCRAX)
• JHancock Infrastructure Fund (JEEBX)

Exchange-traded funds

• Global X US Infrastructure Development ETF (PAVE)
• FlexShares Stoxx Global Broad Infrastructure Index Fund (NFRA)
• iShares Global Infrastructure ETF (IGF)

The Fidelity screeners are research tools provided to help self-directed investors evaluate these types of securities. The criteria and inputs entered are at the sole discretion of the user, and all screens or strategies with preselected criteria (including expert ones) are solely for the convenience of the user. Expert screeners are provided by independent companies not affiliated with Fidelity. Information supplied or obtained from these screeners is for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell securities, or a recommendation or endorsement by Fidelity of any security or investment strategy. Fidelity does not endorse or adopt any particular investment strategy or approach to screening or evaluating stocks, preferred securities, exchange-traded products, or closed-end funds. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use. Determine which securities are right for you based on your investment objectives, risk tolerance, financial situation, and other individual factors, and reevaluate them on a periodic basis.