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This year’s launch of two U.S.-listed exchange-traded funds (ETFs) aims to offer investors the ability to capture the growing theme of reshoring as more developed market companies seek to shorten supply chains and increase domestic manufacturing.
Tema American Reshoring ETF RSHO-A and Engine No. 1 Transform Supply Chain ETF SUPP-A are actively managed ETFs, each charging a 0.75 per cent management fee, while taking different approaches to this growing trend, says Roxanna Islam, associate director of research at VettaFi LLC in New York.
Reshoring as an investment theme is “something you have to look very closely at from the individual company level,” she says, explaining why these ETFs are not the typical passive, indexed-based funds.
“It’s a little hard to come up with broad index-based rules for this sort of thing.”
The Tema ETF offers a portfolio of 34 companies that stand to benefit from manufacturing moving back to the U.S., as measured by their investment in upgrading and securing supply chains and reindustrialization. Top holdings include Applied Industrial Technologies Inc. AIT-N, a distributor of industrial supplies, and Vulcan Materials Co. VMC-N, which is involved in construction materials.
Engine No. 1 Transform Supply Chain ETF’s management team employs fundamental analysis of industries and businesses best positioned to benefit from this “generational shift,” creating a portfolio of 24 companies. Among the top holdings are Waste Management Inc. WM-N and Martin Marietta Materials Inc. MLM-N, which manufactures building materials.
Indeed, the launches might feel prescient given global trends, says Tyler Mordy, chief executive officer and chief investment officer at Forstrong Global Asset Management Inc. in Toronto.
“The world is facing a deepening geopolitical divide and a global economy that is fragmenting into competing blocs,” he explains, based on Forstrong’s macroeconomic analysis.
The amount of trade restrictions has increased tenfold, he adds, while industrial policies aimed at reshoring and “friendshoring” strategic industries are multiplying.
“That has only been magnified in the past few years with the pandemic, revealing the delicate nature of global supply chains,” Ms. Islam adds.
Despite reshoring being a much-talked-about trend, the ETFs have not really caught on with investors, says Lois Gregson, senior ETF analyst with FactSet Research Systems Inc. in St. Louis.
“When a product launches that’s of high interest, you see a lot of money flow into it, and I haven’t seen that,” she says.
Engine No. 1 Transform Supply Chain ETF launched in February and Tema American Reshoring ETF in May, but each has garnered about US$10-million in assets under management (AUM) so far. Their performance may account for lacklustre interest, she adds.
Another reason investors may not be pouring capital into these ETFs is because they have alternatives – broad-based, passive ETFs offering similar exposure at lower costs. That includes The Industrial Select Sector SPDR Fund XLI-A, Ms. Gregson says. It has a 0.1 per cent management expense ratio (MER), and among its 76 holdings are companies held in the reshoring ETFs. Those include Caterpillar Inc. CAT-N and CSX Corp. CSX-Q, which is involved in transportation services.
The Industrial Select Sector SPDR Fund is up 4 per cent this year, but has garnered more attention with flows of about US$1.2-billion this year.
Another similar theme is infrastructure, Ms. Islam says. “And that’s really where we’re seeing more” fund flows, she adds.
Global X U.S. Infrastructure Development ETF PAVE-A, for example, had seen inflows of about US$1-billion this year and the MER is 0.47 per cent, according to FactSet data. It’s up about 13 per cent this year.
Ms. Gregson notes that U.S. policy is a key driver, pointing to the passing of the Build Back Better Act.
“That was basically aimed at bringing things closer to consumers and making production and manufacturing more resilient,” she says.
But a large focus is repairing and improving infrastructure from roads and bridges to high-speed internet and clean energy to support manufacturing, she adds.
While noteworthy, the move toward reshoring faces headwinds, given that high “labour costs in North America and other developed nations are a massive hurdle,” Mr. Mordy says.
“Advances in robotics and automation can certainly help … but displacing the scale and efficiency that global supply chains have built over the past decades may prove … insurmountable.”
An alternative approach is exposure to developing markets other than China, given investor concerns are often focused on developed economies’ overreliance on that country’s manufacturing sector.
In turn, ETFs such as VanEck Vietnam ETF VNM-A and iShares MSCI Mexico ETF EWW-A offer exposure to “nations where wages are low, populations are young and relatively skilled” and – as a result – may benefit “enormously” from supply-chain diversification, Mr. Mordy says. Both ETFs are up about 10 per cent this year.
Yet, for clients who believe deeply in the reshoring theme, the new ETFs offer advisors a way to provide exposure, Ms. Gregson says.
“They might allocate a slice of the portfolio tilted to this while keeping in mind that we haven’t yet seen that this approach will actually result in improved performance,” she says.
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