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Manufacturing Reshoring Ahead? ETFs to Profit

U.S. industrial stocks and ETFs are simply on a tear post Trump win. His pledges to cut taxes, boost fiscal spending and be stricter about outsourcing made these possible. He is highly expected to bring U.S. manufacturing jobs back to the country (read: Sector ETFs Hitting 52-Week High on Trump's Victory).

It is widely believed that North America and Western Europe are high-cost nations and Latin America, Eastern Europe, and most of Asia — especially China — are low cost destinations. This difference is seen as the reason for the rise in manufacturing offshoring in recent times. But Trump’s win now may set the trend for manufacturing ‘reshoring’.

Average hourly earnings in the U.S. grew 2.8% in October year over year and from 2.7% in September. On the other hand, income increases in China have been in the range of 7%.

Also, low interest policies in most developed economies lead to the growing availability of bank financing for manufacturers. “Lower energy prices, less union powers, and government incentives” are the other factors to drive manufacturing reshoring. If this was not enough, in his campaign, Trump indicated that he will levy fat tariffs on Chinese and Mexican goods, making imports costlier. All these factors should facilitate U.S. industrial and manufacturing companies to gain market share.

Is There Something More to Trump?

The beginning of Q4 calls for an improving trend in manufacturing activity globally. Readings in several big economies’ manufacturing activities came in favorable in recent times giving cues of renewed strength in global superpowers.

This area has long been an issue with global growth worries translating into softer demand. However, the weakness has slowly been dispersing. Let’s take a look at the data points. Most of the PMI readings came in higher than 50, pointing to an expansion in activity. ISM purchasing manufacturers’ index grew to 51.9 in October from 51.5 in September and was in line with economists’ forecast (read: Global Manufacturing in Growth Zone: ETFs to Watch).

Moderate Q3 Earnings

In the Q3 reporting cycle, the industrial products sector saw a 10.6% rise in earnings on 0.1% higher revenues as per Earnings Reports published on November 9. The construction sector witnessed 7.1% growth in earnings on 7% higher revenues. This gives cues of a decent earnings trend building underneath the sector.

Market Impact

There are hardly any U.S.-based industrial ETFs which have not returned at least 3.5% in the last five trading sessions (as of November 15, 2016). Funds discussed below offer targeted bets on the sector and tapping these can help investors garner profits if confidence in the bloc continues to rise (see all industrial ETFs here).

First Trust RBA American Industrial Renaissance ETF AIRR

AIRR focuses on the industrial segment of the U.S. market. The fund has a small-cap focus. AIRR charges investors 70 basis points a year in fees and has top holdings in Tutor Perini (4.09%), Granite Construction (3.60%) and MasTec Inc. (3.30%).

PowerShares S&P SmallCap Industrials Portfolio PSCI

As the name suggests, the fund gives exposure to small-cap stocks belonging to the U.S. industrial sector. The 104-stock fund charges 29 bps in fees. No stock accounts for more than 2.13% of the fund.

First Trust Industrials/Producer Durables AlphaDEX Fund FXR

The 94-stock fund charges 63 bps in fees. The fund follows an "enhanced" index. No stock accounts for over 2.14% of the portfolio.

John Hancock Multifactor Industrials ETF JHMI

The 184-stock fund’s focus is on stocks with smaller capitalization, lower relative price, and higher profitability. Its top holding is General Electric (4.09%). The fund’s net expense ratio is 0.50%.

Fidelity MSCI Industrials Index ETF FIDU

The 335-stock fund charges 8 bps in fees. This fund is also heavy on General Electric (11.53%) followed by 3M Co (4.31%) and Boeing Co (3.73%) (read: GE Posts Mixed Q3 Results: Industrial ETFs in Focus).

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JH-M-F INDUS (JHMI): ETF Research Reports
FID-INDUSTL (FIDU): ETF Research Reports
FT-INDL/PROD (FXR): ETF Research Reports
FT-RBA AMER IND (AIRR): ETF Research Reports
PWRSH-SP SC IND (PSCI): ETF Research Reports
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