Utilities could be the underrated beneficiaries of a U.S. infrastructure overhaul, one CEO says.
With Washington lawmakers working to make the Biden administration’s $579 billion infrastructure spending framework a reality, the year’s worst-performing sector could be in for a rebound, Reaves Asset Management CEO Jay Rhame told CNBC’s “ETF Edge” this week.
Two major tailwinds could propel utilities higher, said Rhame, whose co-manages the Virtus Reaves Utilities ETF (UTES).
The first is potential spending on things like electric transmission, grid resilience and electric-vehicle charging infrastructure, which is “incremental to growth,” Rhame said in the interview Wednesday.
The second is the administration’s focus on clean energy, the CEO said. Biden has previously expressed goals of reaching carbon-free power generation by 2035 and net-zero greenhouse gas emissions by 2050.
“This is really the big upside for the sector,” Rhame said. “There’s been talk about extending the tax credits for wind and solar, even creating a new tax credit for nuclear production for existing nuclear facilities and then a standalone tax credit for battery storage.”
Those tax credits could continue to lower costs to the point where building new sustainable energy infrastructures is cheaper than maintaining fossil fuel plants, he said.
“It creates an interesting dynamic for utilities to really transition the grid to more renewable energy and do it in a cost-effective manner, and it should be a nice growth opportunity for the sector,” Rhame said.
“They’ve really underperformed recently, and I think a lot of that’s been focused on interest rates [and] higher inflation expectations, but once you get past that and look out to the longer term, there seems to be a nice catch-up trade opportunity there,” he said.
While federal infrastructure spending typically doesn’t transfer directly to publicly traded companies, there are still ways to play the space, Dave Nadig, chief investment officer and director of research at ETF Trends and ETF Database, said in the same “ETF Edge” interview.
He flagged two ETFs: the Global X U.S. Infrastructure Development ETF (PAVE) and one of its internationally focused counterparts, the FlexShares STOXX Global Broad Infrastructure Index Fund (NFRA).
“I actually kind of prefer the international play here. I think a lot of the big companies we might associate with the development of these sort of full infrastructure buildouts around the world are really in that international fund,” Nadig said. “So, NFRA I think is the more interesting long-term play. If you’re looking to catch that pop from the headlines, PAVE is probably the way to go.”
Still, the catalysts for those funds “are largely about sentiment more than direct revenue from A to B,” he warned.
PAVE is up nearly 22% so far this year. NFRA has gained just over 8.5%.
As for utilities, Nadig said the group “is generally much beleaguered and does have some interesting opportunities, but you really do need to pick and choose there.”
