Yesterday, Ed Yardeni, president and chief investment strategist of Yardeni Research put out his morning note.
There's nothing special about that; he puts one out every morning, and he's one of the sharpest economists I follow. In his latest note, he continues pounding the table for a "new industrial revolution" backed by increased global manufacturing and access to technology.
Amazon's drone-delivery service that stole headlines all weekend comes to mind.
In street parlance, Yardeni made an interesting "alpha" call. But what's a "beta" investor—in other words, 90 percent of the readers of this site—to do with information like that?
A quick stroll through the ETF Finder won't yield a single fund that claims to be a "manufacturing" play. In fact, of all the sectors or themes in the economy, manufacturing may be the hardest to pin down and the least understood.
What the heck do we mean when we say "manufacturing," anyway?
From a headline perspective, when you read about government statistics in manufacturing, you're generally looking at manufacturing as defined by the Bureau of Labor Statistics. And that's a big, broad list of things, ranging from folks who make food and clothing, to iron mills and car companies, to Apple computers.
There's no single ETF that can package up all these pieces for you. In reality, a call on "manufacturing" this broadly defined is a bit of a combined call on two sectors:consumer non-cyclicals and industrials.
That's a pretty big list of funds to choose from. Our system tracks eight broad-based U.S. consumer non-cyclical ETFs:
|Fund Name||Symbol||Expense Ratio||AUM|
|Consumer Staples Select SPDR||XLP||0.18%||$6,810,812,904|
|Vanguard Consumer Staples||VDC||0.14%||$1,666,854,635|
|First Trust Consumer Staples Aphides||FXG||0.70%||$893,748,482|
|shares U.S. Consumer Goods||IYK||0.46%||$485,303,157|
|Guggenheim S&P Equal Weight Consumer Staples||RHS||0.40%||$89,382,089|
|Power Shares S&P SmallCap Consumer Staples||PSCC||0.29%||$51,776,858|
|PowerShares Dynamic Consumer Staples||PSL||0.65%||$39,562,160|
|Fidelity MSCI Consumer Staples||FSTA||0.12%||$20,788,856|
For this reason, a better play would be the ETF on our Opportunities List, the iShares U.S. Consumer Goods ETF ( IYK | B-79 ). Looking at the Fit chart from the segment report on that link, you can see that IYK eschews retailers altogether, and picks up some firms more commonly thought of as cyclical, like Electronic Arts, or industrial, like Ford Motor company. At 0.46 percent, it's a bit pricey, but it tracks and trades well enough for any investor to feel comfortable owning it.
On the industrials side of the equation, things are also a bit tricky. Our analyst pick here is the iShares U.S. Industrials ETF (IYJ | A-93) and it fits the bill.
The expense ratio is identical, it trades like water and it conveniently doesn't include automotive companies, which would have caused some unintentional overlap.
Top holdings are just the kind of thing you might expect with a few exceptions:It includes shipping companies, like UPS, as well as professional services companies, like Accenture.
And another eight broad-based industrials ETFs:
|Fund Name||Symbol||Expense Ratio||AUM|
|Industrial Select SPDR||XLI||0.18%||$8,610,871,912|
|iShares U.S. Industrials||IYJ||0.46%||$1,525,787,178|
|First Trust Industrials/Producer Durables AlphaDEX||FXR||0.70%||$555,602,675|
|PowerShares Dynamic Industrials||PRN||0.65%||$117,171,705|
|PowerShares S&P SmallCap Industrials||PSCI||0.29%||$87,145,500|
|Guggenheim S&P Equal Weight Industrials||RGI||0.40%||$67,105,144|
|Fidelity MSCI Industrials||FIDU||0.12%||$21,107,380|
So, what combination of these two sectors gives you the cleanest play on a U.S. manufacturing boom, and what would that look like as a portfolio? Let's start with looking at our picks in each segment.
In consumer non-cyclicals, our analyst pick is the Vanguard Consumer Staples ETF (VDC | A-94).
We like it for a few reasons:at 0.14 percent, it's extremely efficient. It trades really well, and perhaps more importantly, it delivers pure-play exposure to the segment. Like most market-cap-weighted sector funds, it's top heavy, dominated by a 12.2 percent position in Procter & Gamble and an 8.5 percent position in Coca-Cola.
Where it falls down is that it includes a swath of retailers that don't fit the "manufacturing" theme here:Walmart, CVS, Walgreens and their ilk. It also skips out on most tech companies, which tend to be classified as cyclical.
To minimize exposure to these two sectors, your clearest option is the First Trust Industrials/Producer Durables AlphaDex ETF ( FXR | B-63 ).
The issue there is you're no longer buying clean exposure to the sector. FXR tilts decidedly mid- and small-cap as it equal-weights its 100 holdings, and it's a quant-active bet that's both expensive at 0.70 percent and unproven in terms of risk-adjusted performance over the long haul (although it's done quite well this year).
A cleaner bet is the Vanguard Industrials ETF (VIS | A-91). As the rating suggests, the fund is cheap, trades well, and mirrors the broad industrials space well, with one exception—it skips out on a lot of professional services companies. In this case, since we're chasing a manufacturing theme, that's a good thing.
So where does that leave you, with a 50/50 mix of these two unlike funds, VIS and IYK? It leaves you with a top-20 portfolio that looks something like this:
|Company||Ticker||% of Portfolio|
|General Electric Company||GE||6.12%|
|The Procter & Gamble Company||PG||5.83%|
|The Coca-Cola Company||KO||3.96%|
|Philip Morris International Inc.||PM||3.81%|
|The Boeing Company||BA||2.14%|
|United Technologies Corporation||UTX||2.10%|
|Altria Group, Inc.||MO||1.97%|
|Ford Motor Company||F||1.75%|
|Union Pacific Corporation||UNP||1.59%|
|United Parcel Service, Inc. Class B||UPS||1.59%|
|Mondelez International, Inc. Class A||MDLZ||1.57%|
|NIKE, Inc. Class B||NKE||1.49%|
|Honeywell International Inc.||HON||1.45%|
|Emerson Electric Co.||EMR||1.08%|
With the possible sole exception of United Parcel Service, which looks for all the world to me like a solid run at the manufacturing theme, and delivered in two highly tradable and efficiently managed packages. And given my personal reliance on those big brown trucks for my holiday shopping this year, I'm willing to let UPS keep its spot in the portfolio. At least until the Amazon drones start flying.
The moral of the story here is simple:While there may not be an ETF for every theme, often just a little digging under the hood can yield something pretty darned close.
At the time this article was written, the author held no positions in the securities mentioned. Contact Dave Nadig at firstname.lastname@example.org.