The demand for infrastructure is driven by two primary factors. The first is the need to improve developed world infrastructure. The second is the requirement for developing countries to develop new infrastructure that will support economic development. Both are long-term revenue drivers that will drive expansion at an ETF like the iShares Global Infrastructure ETF (0.00%) , a construction equipment firm like Caterpillar (0.30% ), and an industrial technology corporation like Trimble (1.79%). Here’s why…
The best infrastructure ETF to buy
The iShares Global Infrastructure ETF is an excellent way to gain broad-based exposure to the sector. While other infrastructure ETFs just invest in U.S. firms or have a high concentration in media and communication companies, the iShares product concentrates on worldwide infrastructure investments. The majority of its holdings are in utilities, transportation securities, and energy toll roads, among other things.
It’s a pure-play worldwide infrastructure investment, so it provides exposure to both of the themes covered in this introduction. Furthermore, given that many infrastructure firms tend to be mature and cash generating, the ETF produces a reasonable dividend (current yield is 2.7%) while also promising long-term capital gains. As a result, I believe it is the best all-around infrastructure ETF.
Caterpillar, the long-term commodity boom, and infrastructure
The relationship between the two is obvious, since Caterpillar’s main business is construction equipment. The connection to infrastructure investment becomes obvious when you consider that a $350 million increase in profit from the combination of resource industries (mining and aggregates) and energy & transportation (oil & gas, power generation turbines, industrial turbines, and locomotives) exceeded the construction industries segment by $350 million.
Caterpillar’s sales are not limited to construction equipment and the government/retail/commercial construction market. If the world is going to invest in mining commodities, rail networks, and energy to support infrastructure development, Caterpillar will undoubtedly be a winner.
For example, Caterpillar’s value is boosted by the long-term capital expenditure trend, as well as the possibility of a future long-term upswing in mining and energy investment. Following a commodities crash in 2014, many commodity firms reduced spending, resulting in a multiyear low in oil and gas investment in 2020.
Now that commodities prices are up, and the medium-term supply picture is becoming murkier owing to the war in Ukraine (Russia and Ukraine are both significant commodity exporters), miners and energy firms may increase capital expenditure over an extended period, not least to make up for previously avoided expenditures.
Trimble, an under-the-radar infrastructure play
A more sophisticated take on the positioning strategy is to integrate it into existing infrastructure. Trimble’s technology allows businesses to better position, model, analyze, and control their physical assets. Its primary end markets are resources and utilities, transportation, geospatial, and construction.
The buildings and infrastructure sector accounted for 43% of Trimble’s operating income in 2021, with resources and utilities at 28 percent and geospatial at 23%. A rise in construction, infrastructure, utilities, and energy spending will undoubtedly benefit Trimble. However, there is a more fundamental historical reason behind its expansion in those areas.
Trimble’s technology allows for more accurate positioning, resulting in lower costs and quicker completion of construction and infrastructure projects. Given the industry’s notorious problems with cost overruns and waste, Trimble’s technology might provide significant value for governments and firms investing in infrastructure. Furthermore, reducing waste will enable customers to fulfill their carbon emissions targets for building – the sector is a major source of carbon emissions.
Trimble should also be included on lists of firms benefitting from infrastructure development.
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