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Industrials are the fifth-largest sector weight in the S&P 500 putting the sector right in the middle in terms of weight in the benchmark domestic equity gauge, but given the group’s historical prominence, it’d receive more attention.
Then again, industrial stocks pale on the glamour scale relative to communication services and technology fare. Superficial metrics aside, the industrial sector remains relevant, particularly at a time when some market observers believe value stocks are poised for resurgence. Throw in the politicization of reshoring manufacturing jobs and there are potential catalysts afoot for industrial stocks.
On the other hand, the reshaping (to put it delicately) of General Electric (NYSE: GE) and the recent spate of woes at Boeing (NYSE: BA) confirm the industrial sector is like any other in that it’s hard to pick individual stocks.
That’s an indication that exchange traded funds merit consideration when tapping the industrial sector and there are occasions in which investors can be rewarded for embracing fresh approaches. Take the case of the First Trust RBA American Industrial Renaissance® ETF (AIRR), which will be explored here.
Attractive Angles on AIRR
AIRR, which follows the Richard Bernstein Advisors American Industrial Renaissance® Index, doesn’t garner the acclaim of more traditional ETFs in this category, but the First Trust fund is home to more than $1.8 billion in assets under management and turns 11 years old next month. So it’s neither small nor young.
Two things separate AIRR from standard industrial ETFs. This focuses on mid- and small-cap stocks and it includes some exposure to community bank equities. The mix has served investors well. To their credit, small-cap industrial stocks, as measured by the S&P SmallCap 600 Industrial Index, performed well over the past three years. That index surged 45.2% while the broader parent gauge gained just 10.6%. During that span, AIRR returned a stellar 86.1%.
The longer-ranging outlook for AIRR is bright as well. As has been widely noted, the coronavirus pandemic laid bare vulnerabilities in the global supply chains, prompting companies and the U.S. government to examine brining more manufacturing back to the U.S.
“Considering these issues, many U.S.-based companies have begun reevaluating existing supply chains and expanding manufacturing onshore,” according to First Trust research.” A recent survey of North American manufacturing executives found that 90% of companies have relocated production in the last five years. “And despite a recovering economy, U.S. imports from 14 low-cost countries in Asia fell 14% from 2022 to 2023.7 After decades of expanding globalization, we believe the tide has begun to shift in the opposite direction.”
Policy Support for Industrial Sector
With Election Day right around the corner, market participants are examining how post-election policy could affect various sectors and industries. AIRR could be in that spotlight because both presidential candidates have frequently discussed brining more manufacturing jobs back to the U.S.
Whether that goal is realized is a different matter, but it’s on politicians’ radars and some moves to that effect have already occurred, indicating there’s a runway for AIRR to potentially reap rewards in the years ahead.
“For example, the CHIPS and Science Act was passed in 2022, authorizing $52.7 billion in financial incentives for semiconductor companies to increase domestic manufacturing,” notes First Trust. “Over the past three years, construction spending on computer, electronic, and electrical plants (including semiconductors) grew by more than 1,000%, accounting for 79% of the increase in factory construction over that period Additionally, some semiconductor manufacturers such as Micron, have announced multi-year plans for further investments.12 By 2030, the U.S. Department of Commerce expects the U.S. to produce 20% of the world’s leading edge logic chips, up from 0% today.”