U.S. Manufacturing ETFs Gain Assets as Investors Focus on 'Reshoring'

Investors are increasingly turning to exchange-traded funds (ETFs) that emphasize companies revitalizing or expanding their production in the U.S., taking advantage of government incentives.

 

So far this year, around $2.25 billion has been poured into a select group of ETFs focused on the 'reshoring' trend, bringing their total assets to a record $9.67 billion by the end of August.

 

"Reshoring is viewed by companies as a key long-term growth driver. Our goal is to pinpoint the leaders or facilitators of this trend before it becomes widespread," said Chris Semenuk, head of the actively managed Tema American Reshoring ETF (RSHO.P), which was launched last year.

 

The assets under RSHO.P have surged from $6 million in May 2023 to $101.5 million by the end of August. The fund has experienced nearly a 16% year-to-date increase, compared to the S&P 500's 17.7% gain.

 

Many manufacturers are relocating production to the U.S. to mitigate supply chain disruptions and avoid tensions between Washington and Beijing, which are discouraging investments in China.

 

In late 2021, Congress approved over $1 trillion for new infrastructure projects, followed by a bill allocating another $200 billion for chip manufacturing the following summer.

 

Several major corporate actions have further fueled interest, such as Taiwan Semiconductor Manufacturing Co's (TSMC) decision to increase investment in new Arizona plants to $65 billion, and the federal government's $500 million grant to Century Aluminum (CENX.O) to build the first aluminum smelter in the U.S. in 45 years.

 

BlackRock is the latest major ETF provider targeting investor funds, as the reshoring theme gains momentum, partly due to its relevance in the U.S. presidential race's focus on economic growth and job creation. BlackRock introduced the iShares U.S. Manufacturing ETF (MADE.P) in July.

 

"These stocks could benefit regardless of the election outcome," said Jay Jacobs, head of thematic and active ETFs at BlackRock, in the latest episode of "Inside ETFs." "It's a rare area of bipartisan agreement."

 

Shares of the ETF have gained 3.5% over the past 30 days, compared to the S&P 500's approximately 0.9% increase, according to LSEG. The new BlackRock fund currently holds nearly $6 million in assets.

 

Top performers in the U.S. manufacturing sector include Caterpillar (CAT.N) and Eaton Corp. (ETN.N), which have risen 16.4% and 27.6% year-to-date, respectively. The S&P 500 industrials sector, which includes many companies in these ETFs, has increased 13.5% this year.

 

However, recent economic data that fell short of expectations, including a decline in U.S. manufacturing construction spending, has raised concerns about a potential slowdown in U.S. economic growth. The Federal Reserve is anticipated to cut interest rates for the first time in years during its September 17-18 meeting to ease monetary policy ahead of any potential downturn.

 

Meanwhile, some stocks have become more expensive as the broader market has rallied. For example, the industrial sector is trading at a forward price-to-earnings ratio of 26.7, compared to 19.2 a year ago.

 

"Attractively priced opportunities are limited; the valuations we saw in early 2020 are no longer available," noted Jeff Muhlenkamp, manager of the $249 million Muhlenkamp Fund, a mutual fund.

 

He also warned that reshoring does not inherently guarantee superior returns, citing that companies bringing manufacturing back to the U.S. could face higher labor and raw material costs.

 

Whether this will affect the strong growth these funds have seen this year remains uncertain. According to Morningstar, the $1.5 billion First Trust RBA American Industrial Renaissance ETF (AIRR.O), launched in 2014, has tripled its assets over the past 12 months. Similarly, the $8.04 billion Global X U.S. Infrastructure Development ETF (PAVE.Z), launched in 2017, has grown by 50% over the same period.