You don't need a crystal ball to see where the U.S. economy is headed in coming years. We already know.
Certain industries are poised for very good years ahead, and there's no need to wait around for signs of their revival.
Nor do you need to spend days or weeks finding the right stocks to play such themes. Well-constructed exchange-traded funds (ETFs) have already built portfolios with all the exposure you'll ever need. Let's take a closer look.
|1. The Manufacturing Renaissance|
|More than a year ago, I read one of the most compelling business articles written in the recent era. As the authors noted about a strategic decision by General Electric (NYSE: GE) to crank up once-dormant assembly lines here in the U.S., it simply no longer made sense to build the company's hot water heaters in China: |
"A funny thing happened to the GeoSpring on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up. GE wasn't just able to hold the retail sticker to the 'China price.' It beat that price by nearly 20%. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299."
Since then, I've read a dozen variations on this theme from different publications. It appears that many CEOs besides GE's Jeff Immelt are taking a fresh look at insourcing. The move is no doubt aided by the fact that China's wages have been rising at a fast clip.
In the years ahead, this hiring boom could create many beneficial effects, including better-paying jobs (at least compared to retail), less need for government benefits support, firmer local real estate markets and increased U.S. exports, which strengthens the broader economy.
Equally important, the companies that are shifting these jobs back home are doing so because its boosts their bottom lines. And even though share prices of these manufacturers have rebounded impressively since the Great Recession of 2008, this manufacturing renaissance is only getting started.
Rather than focus on the top stock picks, you can also look to own the best ETFs. My favorites include:
The PowerShares S&P SmallCap Industrials (Nasdaq: PSCI), which focuses on the small and mid-size firms that act as key suppliers to the nation's largest manufacturers. As firms like GE bring production home, their suppliers are following suit to help shorten supply lines. The fund carries a very reasonable 0.29% expense ratio.
If you want to focus on the large-cap manufacturers, check out the Vanguard Industrials ETF (NYSE: VIS), which carries an ultra-low 0.14% expense ratio. This ETF is a clear play on rising U.S. exports as well: "Many of VIS' holdings have significant sales outside of the United States, giving this fund some exposure to global growth trends," note analysts at Morningstar.
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|2. Housing's Slow Climb Back|
| Although home prices have held on to their impressive gains of the past few years, sales of new homes were a bit disappointing in recent quarters. Blame goes to rising mortgage rates and a still-uncertain employment outlook. |
The year ahead is unlikely to show signs of a housing boom either, but the view after that starts to get a lot brighter. That's because there are still more than 2 million Americans who would have already formed new households by now but have not yet done so.
As the U.S. economy creates more jobs, consumer confidence and consumer finances will both strengthen, and this pent-up housing demand will be unleashed. The SPDR S&P Homebuilders ETF (NYSE: XHB), which carries a reasonable 0.35% expense ratio, owns a wide range of companies that will indirectly benefit from the coming housing boom. Top holdings include mattress maker Select Comfort (Nasdaq: SCSS), floor covering maker Mohawk Industries (NYSE: MHK), and do-it-yourself retailer Home Depot (NYSE: HD).
If you want to own a basket of the homebuilders themselves, then check out the iShares US Home Construction ETF (NYSE: ITB). Though Morningstar cautions that homebuilders are quite volatile, "the housing market is still leading the economic recovery. Certainly, plenty of conditions have been in place to bring buyers to the table, including still-low (by historical standards) mortgage rates, gradual declines in unemployment, and tight inventories."
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|3. The Natural Gas Renaissance|
| We've all read a great deal about how the U.S. has quickly become one of the world's leading producers of oil and gas. The impact on natural gas prices in particular has been profound. Not only are our natural gas prices much lower than many other parts of the world, but the abundance of this gas means that companies can count on low-cost gas far into the future. |
That's why so many companies that use natural gas in their manufacturing processes are shuttering global plants and reopening new ones here in the United States. From plastics to fertilizer to fuel, U.S.-produced gas is becoming a backbone of industry. The Materials Select Sector SPDR (NYSE: XLB) is a good way to play the trend, as is the iShares US Basic Materials ETF (NYSE: IYM).
Risks to Consider: The real risk to these industries is a fresh slowdown in the U.S. economy, which looks decreasingly likely as we turn the page to 2014.
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Action to Take --> If the 1990s were the era of IT and dot-coms, and the past decade was the era of runaway consumer spending, the current era is shaping up to be led by manufacturing and low-cost energy. The follow-on benefits to the U.S. economy are too numerous to mention, though housing is a clear consumer-based beneficiary. These ETFs can be bought and held for an extended period, as the factors behind them won't be fading away anytime soon.