The U.S. Industrial sector is due for a trend reversal this year
mainly to reflect the reduced wage differential between developed
and emerging economies. 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. However, the rising wages in emerging countries and
sluggish rise in hourly wages in developed nations have gradually
been filling the gap.
This has given birth to the trend of 'reshoring' which basically
means the return of manufacturing hubs to the U.S.
BCG's latest reports
shows that steep wage rises in emerging nations, sluggish
productivity growth, strengthening of the U.S. dollar against a
basket of emerging currencies and a sharp rise in energy costs in
those nations have marred the appeal for offshoring activities.
Narrowing Wage Differential
At the time of the launch of its Industrial Renaissance ETF (
) this year, First Trust provided some data issued by the Economic
Policy Institute which says, during the crucial recession period of
2007 to 2012, wages in the U.S. declined for the bottom 70% of U.S.
workforce despite productivity expansion of 7.7%.
Average hourly earnings in the U.S. are currently rising at a pace
less than 2%
while China - one of the greatest manufacturing offshoring
destinations - saw wage increases of about 10.7% last year and
looks to log another
or more rise in wages this year.
Minimum wages should rise until the mark of 40% of average urban
salaries by 2015 is attained, according to a guideline issued by
the State Council in February 2013, to deal with the country's
broadening wealth gap. As a result, China's manufacturing-cost
advantage over the U.S. has fallen to less than
Not only this, but manufacturing costs in eastern European nations
- also offshoring havens - are at now equivalent to or above the
level in the U.S. Apart from the U.S., the U.K. and the Netherlands
in Western Europe and Mexico in Latin America can now be picked as
low cost manufacturers.
Manufacturing "Renaissance" in the U.S.
Wages aside, there are also other factors that positively influence
manufacturing or industrial activity in the U.S. Relatively low
energy prices when compared to many of its global competitors are
also playing a vital role in this boom (read:
3 ETFs for Manufacturing "Renaissance"
The U.S. economy has now come a long way from the meltdown that
occurred five years back. All economic indicators are improving
from the pre-crisis level hinting at rising domestic demand for
The European revival has also contributed to industrial growth in
the U.S. As per Richard Bernstein Advisors (RBA), growing
availability of bank financing for manufacturers is also driving
the sector. All these factors should facilitate U.S. industrial and
manufacturing companies to gain market share.
While there are several other factors to consider before shifting
the manufacturing base from one nation, a company should also
consider the proximity of
from the manufacturing base, as per BCG. But wage and currency are
significant factors, and are lately providing all the needed
support to the U.S. industrial sector (read:
Play Surging U.S. Manufacturing with These
Funds discussed below offer targeted bets on the sector and can
help investors garner profits if the wage differential continues to
narrow down and if the U.S. continues to become a manufacturing
powerhouse once more:
Industrials/Producer Durables AlphaDEX Fund
This fund follows the StrataQuant Industrials Index which is based
on the AlphaDEX stock picking methodology. Instead of focusing
solely on the market cap, this technique closely monitors the
stocks' price appreciation/momentum, sales and earnings growth as
well as value factors and ranks (see
The ETF has managed assets worth $809.9 million. In total, the
product holds 102 securities, which are not at all concentrated on
its top 10 holdings.
In fact, not a single company accounts for more than 1.79% of the
basket. The strategy eases out the risk quotient of the fund.
Investors have to pay 70 bps in fees and expenses which is higher
than the average expenses charged by the industrial equities ETF.
FXR has gained 3.78% so far this year. The product has a Zacks ETF
Rank of 1 or 'Strong Buy' rating with a 'Medium' risk outlook.
Vanguard Industrials ETF (
VIS tracks the MSCI US Investable Market Industrials 25/50 Index
and invests about $1.65 billion in 340 holdings. The fund has
moderate company specific concentrator risks with about 40%
exposure in top 10 assets.
The fund gained about 0.52% so far this year. It charges a dirt
cheap expense ratio of 14 bps a year. The fund has a Zacks ETF rank
of 2 or Buy rating with a medium risk outlook.
Guggenheim S&P 500 Equal Weight Industrials
Yet another tempting, but often overlooked, option is RGI. The fund
seeks to track the performance of the S&P 500 Equal Weight
Index Industrials. So far, the fund has amassed an asset base of
$91.7 million and is invested in 65 holdings.
In terms of performance, RGI is up about 1.43% year to date.
Moreover, RGI charges about 40 basis points a year. Being an
equal-weight product, RGI has a medium risk outlook while it
carries a Zacks ETF Rank #2 as well (read:
Overweight These Equal Weight ETFs in Your
Although on a nominal basis daily wages in the emerging markets are
still lower than that in the U.S., the wage growth has been higher
in emerging nations than the developed ones with no sign of a
change in this fashion, at least for the near term.
So, investors looking for industrial exposure should consider these
products in their portfolio to book profits out of the 'reshoring'
trend. These ETFs are the top-rated ones that have beaten similar
products thus far and could run higher in the course of 2014.
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FT-RBA AMER IND (AIRR): ETF Research Reports
FT-INDL/PROD (FXR): ETF Research Reports
GUGG-SP5 EW IND (RGI): ETF Research Reports
VIPERS-INDUS (VIS): ETF Research Reports
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